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Leaders watch nervously after Portugal government tumble

Published on 25/03/2011

Tense weeks lie ahead for Europe as it attempts to douse a Portuguese debt fire, with leaders watching nervously Friday as a lame duck government in Lisbon faces tense elections.

After last year’s massive bailouts to 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 new polls expected in May or early June.

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

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.

German Chancellor Angela 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 financial aid 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.”

An EU official, who did not want to be named, said Thursday that Portugal was not expected to request a bailout “before elections which should take place end-May or start-June.”

That would mean Lisbon paying top rates to raise funds to cover maturing obligations of 4.5 billion euros in April, with the same again due by June 15 being the responsibility of a new government. Current rates on Lisbon’s sovereign borrowings have hit nearly eight percent, way above sustainable rates.

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.

The euro and stocks extended gains Friday in a continued rebound from recent heavy losses and relief that Spain may have done enough to escape the net.

That was the one bright spot for EU leaders as they set out a series of measures designed to ensure there will be no future repeats of the debt crisis.

Part of the package involves plans to cut European wage levels and raise retirement ages — the target of up to 20,000 protesters outside the summit venue as the bloc’s 27 leaders arrived for talks.