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Portugal tip of iceberg as Euro leaders tackle debt woes

Published on 23/03/2011

With crisis-hit Portugal on the verge of government collapse and a cry for financial help, European leaders face an uphill task at a summit meant to seal defences against a year-long debt crisis.

Leaders from the 27 European Union states lock horns Thursday and Friday in Brussels, amid divisions over military action in Libya and nuclear safety after Japan’s quake and tsunami severely damaged a reactor.

Once again, though, the euro debt crisis is set to consume most of their energies — as a deadline for a definitive response to financial headaches collides with a fresh run on money markets over Portugal’s descent towards snap polls.

A bailout demand from Lisbon, like Ireland or Greece beforehand, would come at the worst possible time.

A credit rating downgrade drove the interest Portugal must pay on new borrowings over eight percent on Tuesday. Nine billion euros ($12.9 billion) of debt must be repaid by June 15.

Portugal’s parliament was set Wednesday to reject Prime Minister Jose Socrates’ latest austerity plan, aimed at squeezing its public deficit to 4.6 percent of GDP this year.

The Socialist leader has said he will resign in that event.

Belgian police expect some 20,000 anti-austerity protesters to snarl up EU HQ from early Thursday.

A Portugal bailout would need to come from a notional 440-billion emergency fund, the European Financial Stability Facility, but diplomats told AFP that Finland is “not in a position” to strengthen the fund before April 17 elections.

“Finland has excluded any increase of EFSF guarantees on Friday,” one said.

Already tapped by Ireland, the amount the fund could actually lend, allowing for a required buffer to make it profitable, falls to around 200 billion.

If Portugal sounded the alarm, the margin for others would narrow.

And as the heat intensifies, German Chancellor Angela Merkel wants to re-negotiate capital injections into a permanent 500-billion European Stability Mechanism to replace the EFSF in 2013.

Europe’s most powerful and populous economy, Germany was the biggest contributor to the Greek and Irish bailouts — a combined 200-billion-plus.

Slovakia and Estonia also have problems with a “key” determining their contributions.

After a vote in the European Parliament Wednesday, leaders are to endorse an EU treaty change enabling the ESM’s creation, with an additional 200-billion buffer required.

Meanwhile, a raging battle with Ireland, which wants eased terms on its bailout in line with those granted to Greece, will also resurface, with eurozone partners demanding Dublin first raise its low corporation tax levels.

A new ‘Pact’ to support the euro, which sets out benchmarks for EU states across a wide gamut of indicators and has been deemed the “cornerstone” of the bloc’s future defences, is also stirring trouble.

While diplomats told AFP that Poland, Denmark, Lithuania, Latvia and Bulgaria would sign up, current EU chair Hungary announced Tuesday it will not. The Czech Republic had already said no.

France, Spain, Austria and Greece want the goal of a Financial Transactions Tax written in, which Germany, Italy and Denmark oppose.

France, with an eye on the Irish row, wants reference to a need for “pragmatic tax coordination.”

Even eurozone plans to deepen coordination of economic policies and create new sanctions to punish countries that exceed debt limits are not set in stone.

Britain has already secured exemptions to a scheme forcing states to submit national budgets to peer review.

A staggering 2,000-plus amendments lodged by Euro MPs means it may be difficult to meet a June target-date for adoption of new economic governance legislation.

Others want to focus on growth-enhancing measures, as seen in a joint demand from Britain, the Netherlands, Sweden, Denmark, Finland, Estonia, Poland, Lithuania and Latvia.

They want to remove market restrictions, accelerate free-trade deals with India, Canada, Japan, South American and Asian nations, and deepen economic integration with non-EU eastern European and southern Mediterranean neighbours.