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EU leaders wait on Portugal, markets bet on bailout

European leaders faced an anxious wait wait Friday as the markets bet that struggling Portugal will need a debt bailout despite Lisbon’s protests it can avoid one in the run-up to tense elections.

After last year’s massive bailouts for Greece and then Ireland, Portugal slipped towards the brink this week when prime minister Jose Socrates resigned after parliament blocked an austerity plan already agreed with eurozone partners.

“Portugal does not need a financial rescue plan and I will maintain this in defending my country,” Socrates insisted after a European Union summit clouded by his country’s financial troubles.

“I know what this meant for Ireland and Greece, and I don’t wish it on my country,” he added. Socrates has made clear he intends to stand for re-election at polls expected in May or early June.

Germany, the eurozone’s paymaster and most powerful economy, meanwhile insisted that whoever takes power, Lisbon will have to swallow the bitter medicine needed to put its finances in order.

“It is not enough to say — we agree with the targets (for public finances) set by the EU and European Central Bank — you also have to say, publicly, clearly, what measures you will take to reach those targets,” German Chancellor Angela Merkel said at the end of a two-day EU summit.

That goes for both the government and the opposition, Merkel said, adding that such a stance was “indispensible if we want calm to return to the markets.”

EU leaders envisage a Lisbon bailout of perhaps 75 billion euros, anxious to stop its problems claiming more victims.

What “began as a (US) banking crisis, then became an economic crisis and a social crisis (has) … today become a political crisis,” said Belgian Prime Minister Yves Leterme.

EU leaders have been forced to adopt austerity measures so as to stabilise their public finances but cutting spending and raising taxes has proved deeply unpopular and as politicians they are looking over their shoulder at the polls.

Merkel has already suffered the backlash in regional votes and clearly wants to limit any further damage by taking a hardline on bailouts.

As for Portugal, analysts say it is only a matter of time before it has to call for outside help.

“There is no other solution than tapping” eurozone bailout funds, said Dutch-based Alessandro Giansanti of ING. “We should expect further downgrades,” he added after New York-based Standard and Poor’s and London’s Fitch Ratings hammered the Portuguese government’s credit worthiness.

Giansanti said it was “hard to understand the logic” of the Portuguese opposition triggering a political crisis, warning that a bailout involving the IMF would mean “even harsher measures in term of spending reductions, tax increases and asset sales.”

Moneycorp.com analysts said markets had been “waiting so long for Portugal to go into receivership that it will be a relief when the deed is actually done.”

Lisbon faces paying top rates to raise fresh funds to cover maturing obligations of 4.5 billion euros in April, with the same again due by June 15.

Speculation that it will default on its debt has pushed those rates up well above seven percent, an unsustainable level for the long-term.

Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of eurozone finance ministers, has insisted “Portugal won’t be left exposed by its European partners,” although any help would come with “strict conditions.”

French President Nicolas Sarkozy said leaders were “reassured to know that all Portuguese political forces are fully conscious of the need” to deliver on its budgetary commitments.

Lisbon is trying to bring its public deficit down from a record 9.3 percent of GDP in 2009 to 4.6 percent this year but can only reach that target if the austerity measures rejected by parliament — and perhaps more — are implemented.