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Europe tells Portugal to slash spending

Europe told troubled Portugal Thursday it must make painful budget cuts as a crunch EU summit opened amid rising expectations that Lisbon would call for a 75-billion euro bailout.

Led by German Chancellor Angela Merkel, top figures insisted Lisbon’s options were limited, with massive savings on spending required even if it seeks negotiations on a financial rescue package like those given Greece and Ireland.

The two-day European Union summit had been called to bolster defences against a eurozone debt crisis, but was rocked by the overnight resignation of Portuguese premier Jose Socrates.

Socrates quit office after the Lisbon parliament rejected a new national austerity plan and attended the summit in caretaker capacity.

“The only thing I am concerned about is to defend Portugal, defend the European project and defend the single currency,” he said before chatting with Greek Prime Minister George Papandreou and Irish counterpart Enda Kenny in the moments before the summit got under way.

As talks began, London-based Fitch Ratings downgraded Portugal another notch to ‘A-‘ but Portuguese cabinet spokesman Pedro Silva Pereira said Lisbon would “do all it can to avoid resorting to external aid.”

Demonstrators marching towards the summit meanwhile hurled cobblestones at police who retorted with water cannon as up to 20,000 protested at austerity measures including plans to cut European wage levels.

Diplomats practically ruled out a decision on an emergency financial rescue for Portugal during the talks, but Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of eurozone finance ministers, said aid of some 75 billion euros (almost $100 billion) would be “approriate.”

European Commission chief Jose Manuel Barroso, a former Portuguese premier himself, warned that the cuts voted down by parliament in Lisbon remain “indispensable.”

Juncker also said new “savings” are needed in Lisbon and said any bailout would only be granted “under strict conditions.”

Merkel said “it is very, very important that all those who speak in Portugal’s name state clearly their attachment to the objectives of this programme” to rein in the national deficit.

In Brussels for preparatory talks among centre-right allies, the head of Portugal’s main opposition Social Democratic party, Pedro Passos Coelho, said he “hopes” debt-ravaged Lisbon can avoid calling in aid.

“Obviously we’re all worried,” Dutch Prime Minister Mark Rutte said.

Lisbon faces increasing borrowing costs in the countdown to bond repayments amounting to nine billion euros falling due by June 15.

Portugal’s public deficit hit a record 9.3 percent of GDP in 2009 and current money market rates of nearly 7.5 percent are considered unsustainable.

A Portugal bailout would come at the worst possible time, because it would have to be sourced from a temporary European Financial Stability Facility.

Notionally worth 440 billion euros, in reality the fund today is capable only of lending around 200 billion, when allowing for a buffer to make it profitable for participating states.

Finnish President Mari Kiviniemi confirmed that Helsinki cannot increase EFSF guarantees before April 17 elections.

Leaders also had to swallow a last-minute demand from Merkel to renegotiate Berlin’s contributions to a permanent European Stability Mechanism aimed at replacing the EFSF in 2013.

She wants to spread a 22-billion contribution over five years instead of three.