Portugal plunged into political crisis after PM quits

Portugal was plunged into a political crisis Thursday after the prime minister quit following a showdown with parliament over his new austerity plan, a move that boosts the chances that Lisbon will seek a financial bailout.

Prime Minister Jose Socrates tendered his resignation late Wednesday, saying he could not govern without support after all opposition parties voted against his minority government’s latest spending cuts and tax hikes.

The austerity plan — the government’s fourth in a year — was aimed at avoiding the need for a bailout of an estimated 50 billion euros for Portugal to help it meet debt repayment obligations, a package similar to those granted fellow eurozone members Greece and Ireland last year.

“This crisis will have very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets,” Socrates said after presenting his resignation to President Anibal Cavaco Silva.

The events in Portugal threaten to derail a two-day European Union summit that gets underway Thursday in Brussels that had been expected to finalise the bloc’s response to a year-long eurozone debt crisis.

German Chancellor Angela Merkel said Thursday she regretted that parliament had rejected Socrates’ austerity plan, describing it as “correct and courageous.”

The Portuguese president will hold meetings with all political parties on Friday and the government would retain full powers at least until then, the president’s office said in a statement.

That leaves Socrates and his government in place with full powers for the duration of the EU summit although as an outgoing leader his authority is severely restricted.

The president can now invite parties with representation in parliament to form a coalition government or, in the more likely scenario, he can dissolve parliament and call snap elections.

If he opts fresh elections, the vote must be held at least 55 days after they are called.

The Socialists would be at the helm as a caretaker government with limited powers for weeks under this scenario.

The prospect of a prolonged period of political uncertainty in one of the 17-nation eurozone’s smallest and weakest economies caused the euro to drop against the dollar and the Lisbon stock market to open down nearly one percent.

It will also cause Portugal’s already high borrowing costs to rise further at a time when the country faces bond repayments amounting to nine billion euro ($12.9 billion) falling due by June 15.

Tullia Bucco, an economist at UniCredit, said political instability in the run-up to a likely early election would “weaken the position of the sovereign” and put pressure on the country to ask for external aid.

The head of the Eurogroup of finance ministers for the 17 countries that share the single currency, Luxembourg Prime Minister Jean-Claude Juncker, said Wednesday that it was up to Portugal to request financial aid but if it does it would be granted “under strict conditions”.

His comments were taken to mean that tough austerity measures would be demanded of Lisbon in exchange for any aid.

Thousands of workers from the public and private sectors converged on Lisbon from all over Portugal on Saturday to demonstrate against the goverment’s austerity policy, growing joblessness and insecurity.

The Lisbon metro was shut on Thursday morning because of a strike by workers over pay cuts.

The government had argued that the new austerity plan would “guarantee” that Portugal’s public deficit would fall to within an EU limit of 3.0 percent of gross domestic product by 2012.

Portugal’s public deficit hit a record 9.3 percent of GDP in 2009, the fourth-biggest in the euro region after Ireland, Greece and Spain.