Portugal crisis overshadows EU summit

Socrates resigned on Wednesday after all five opposition parities rejected his austerity plan [Reuters]

Portugal’s political crisis and the resignation of the prime minister have overshadowed a European Union summit, which was aimed at tackling the euro zone’s debt problems.

Jean-Claude Trichet, the European Central Bank president, told reporters as he left the summit on Thursday that it was crucial for Portugal to stick to the fiscal austerity measures’ Prime Minister Jose Socrates had proposed.

Socrates quit on Wednesday after parliament rejected new austerity measures that he had hoped would allow the country to avoid the need to seek EU/IMF financial assistance.

Despite stepping down, Socrates came to the two-day summit in the role of care-taker prime minister.

He remains adamantly opposed to requesting aid and has made it clear he intends to hold that line, at least until a new Portuguese government is formed, probably after early elections in about two months’ time.

“The government will continue to fight against the possibility of resorting to foreign aid,” cabinet minister Pedro Silva Pereira said in Lisbon.

Jean-Claude Juncker, the prime minister of Luxembourg who chairs the eurozone finance ministers meetings, told France 24 television that if Portugal asked for a bailout it would need about $106bn – roughly half its annual gross domestic product. That is less than the $155bn Greece got but more than Ireland’s $95bn.

National concensus urged

It was not clear whether the interim government had the authority to negotiate a bailout, nor whether a broad coalition government may be possible or how soon new elections could be held.

Those uncertainties added to tensions and brought an appeal from European Commission president Jose Manuel Barroso, a former Portuguese prime minister.

“The important thing is that, as quickly as possible … there is a national consensus on the need to meet the goals Portugal has set for reducing its deficit and debt levels,” Barroso told reporters.

Having said for weeks that they would agree a “comprehensive package” to tackle the euro zone debt crisis by the end of March, EU leaders at the summit ended up delaying a final decision on boosting their safety net until mid-year, agreed to increase their financial rescue fund to the full $623bn by June.

Standard & Poor’s downgraded Portugal’s credit ratings by two notches from A- to BBB on Friday and warned it could cut it again by one notch as early as next week depending on the final shape of the euro zone bailout fund.

S&P, which followed a two-notch cut by Fitch on Thursday, said the collapse of Portugal’s government resulted in increased political uncertainty, hurting market confidence and potentially raising refinancing risk.

Lisbon needs to refinance about $6.4bn of debt in April and a similar amount in June, which may prove a trigger for finally making the request for aid. One problem is that any bailout request would have to be approved by parliament and the majority is opposed to asking for help.

With Portugal widely expected to seek assistance, attention could soon shift to Spain, which has gradually won back the confidence of investors in recent months by unveiling reforms of the labour market and pension system, as well as a plan for shoring up its ailing savings banks.