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Portugal’s crisis gatecrashes Euro summit

Fears Portugal will seek an urgent financial bailout overshadowed an EU summit Thursday that had been called to bolster defences against the rollercoaster euro debt crisis.

As leaders gathered from 1600 GMT for the two-day talks, a last-minute demand from economic powerhouse Germany to renegotiate its contribution to future bailout funds looked set to pose an extra headache for the 27-nation bloc.

After Portuguese Prime Minister Jose Socrates resigned late Wednesday following parliament’s rejection of his new austerity plan, markets began looking more closely at Spain as a next potential victim.

Echoing opposition on Portugal’s streets to belt-tightening budgets, thousands of trade unionists began massing around European Union headquarters to protest against plans to cut wages to make Europe more competitive.

Diplomats virtually ruled out any decision on an emergency financial rescue of Portugal during the two-day talks as Dow Jones Newswires quoted a eurozone official saying Lisbon would need 80 billion euros ($113 billion).

The fourth cost-cutting plan in a year offered by Socrates, who will be attending the Brussels summit, had been aimed at avoiding the multi-billion-euro bailouts of Athens and Dublin last year.

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

“This crisis will have very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets,” Socrates said.

Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of eurozone finance ministers, said it was up to Portugal to request financial aid but if it does it will only 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.

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, allowing for a buffer to make it profitable for participating states.

Finland has excluded any increase in EFSF guarantees before April 17 elections, and German Chancellor Angela Merkel said she wants to re-negotiate Berlin’s contributions to a permanent European Stability Mechanism aimed at replacing the EFSF in 2013.

As fears of new euro-trouble rippled, Moody’s downgraded the credit ratings of 30 Spanish banks Thursday, warning that Spain’s government may not be ready to write a blank cheque for every troubled bank.

But Dutch-based ING analyst Padhraic Garvey said “the one glimmer of hope is that Spain is holding its own.” Madrid’s position on the sovereign bond market was “non-stressed,” he said.

Merkel also said she wants to spread over five years Berlin’s contributions to the yet-to-be 700-billion-euro ESM ($996 billion), renegotiating injections of paid-in capital and guarantees designed to cover a lending ceiling of 500 billion.

Originally, Germany was to provide half of its 22-billion portion of an 80-billion cash element in 2013, and the rest in three installments over three years, but now Merkel wants to pay five chunks of 4.4 billion euros.

This drew instant criticism, with Juncker warning that delaying payments could rob the rescue fund of its top AAA credit rating.

With the crisis in Portugal and Germany’s new conditions intruding onto a packed summit agenda, there is little chance the EU will resolve Ireland’s call for better terms on its bailout in line with those granted to Greece.

Eurozone partners are demanding Dublin first raise its low corporation tax levels.