Leaders watch nervously after Portugal government tumbles

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 approaches tense elections.

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

But while European Union leaders have to plan for the likelihood of a 75-billion-euro (almost $100 billion) Lisbon bailout, they are also looking over their shoulders lest a crisis that originated on financial markets in America claim even more government victims.

What “began as a banking crisis, then became and economic crisis and a social crisis” amid huge unemployment had “today become a political crisis,” said Belgian Prime Minister Yves Leterme, another who retains power in a caretaker capacity.

First the Greek right-wing government of Costas Karamanlis fell in October, then Brian Cowen’s Irish administration collapsed at the start of February.

Socrates’ downfall was officially the third, although British Labour might also argue that Gordon Brown’s premiership was torpedoed by vast debts there while German Chancellor Angela Merkel too has suffered in regional polls.

“There is no other solution than tapping” eurozone bailout funds, said Dutch-based Alessandro Giansanti of ING. “We hould 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 reduction, tax increases and asset sales.”

England’s Moneycorp.com 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.”

A senior European Commission 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 swallowing a need to pay top whack for April financing requirements of 4.5 billion, with the same again by June 15 being the responsibility of a new government. Current rates on Lisbon’s sovereign borrowings are hitting eight percent.

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 only “under strict conditions.”

Top EU figures from German Chancellor Angela Merkel to European Central Bank chief Jean-Claude Trichet nevertheless warned Portugal there could be no escape from fierce budget savings.

It is trying to bring its public deficit down from a record 9.3 percent of GDP in 2009 to 4.6 percent this year.

After the euro and stocks rebounded, which analysts and commentators put down to lessened fears over Spain despite its exposure to debt in the Portuguese system, the one bright spot for EU leaders as they complete their defences against future repeats of the debt crisis.

“We are, positively, seeing a decoupling between the spreads of the semi-peripherals (Belgium, Italy, Spain) and the real peripherals (Greece, Ireland and Portugal),” said Giansanti.

EU president Herman Van Rompuy deemed these broader defences “a quantum leap” for the 27-state bloc, although up to 20,000 protesters denounced Thursday a new “Euro Plus Pact” which demonstrators said will cut European wage levels and raise retirement ages.