Portugal facing political and economic crisis

BRUSSELS, Belgium — The euro zone’s financial crisis took a turn for the worse Wednesday when the Portuguese Parliament rejected austerity measures proposed by the government, triggering a political crisis in the currency bloc’s current weak link.

Prime Minister Jose Socrates announced his resignation after the opposition united in parliament to reject his latest plan to bring down the ballooning budget deficit and restore flagging market confidence.

Portugal, following Greece and Ireland, will now likely need to request a multi-billion euro bailout from the European Union and International Monetary Fund in order to stay afloat.

Portugal’s woes will add to the headaches of EU leaders who are meeting in Brussels this week and who are already divided over the air strikes taking place in Libya and the future of their own nuclear power programs in the wake of Japan's nuclear disaster.

The summit had been tasked with creating long-term strategies that would ensure euro zone nations don’t let their finances grow out of control, but will now be dominated by the prospect of a Portugal bailout.

“This crisis has been provoked at the worse possible moment, on the eve of a European summit which is crucial for Portugal and for Europe,” Socrates said in Lisbon.

“This crisis has serious implications for Portugal’s position with the European institutions and the financial markets,” he added in a resignation speech, in which he also denounced the opposition for acting against the national interest.

The EU’s main paymaster, Germany, will likely be reluctant to rescue the Portuguese if the country cannot agree on a plan for stabilizing its deficit, which stood at 7.3 percent of GDP last year.

German Chancellor Angela Merkel has already faced public anger over the Greek and Irish bailouts, which totaled 195 billion euros ($275 billion). Facing party defeats in a state election on Sunday, Merkel is unlikely to feel particularly generous.

If Portugal does become the next European nation to need an international bailout, attention will then likely turn to its neighbor — Spain.

Although Spain is in better financial shape, it is suffering from the aftermath of a burst property bubble, compounded by a fragile banking sector and an unemployment rate that has soared to more than 20 percent.

Belgium and Italy, financial analysts said, might also soon be in the market’s crosshairs.

Socrates had long resisted pressure on him to petition for international help.

He has argued that the belt-tightening conditions likely to be imposed by the IMF and EU would be even harsher than the austerity package his Socialist Party was proposing, while undermining the confidence of investors needed to modernize the economy of western Europe’s poorest country.

“Appealing for outside help would have deeply negative consequences, above all for the image, the prestige and the rating of our nation,” Socrates said. “There is a big difference between a country that solves its own problems and a country that has to appeal for foreign help.”

However, the main center-right opposition parties joined forces with smaller Communist and other far left groups to vote down his plans, which included spending cuts, tax increases and privatization of public companies.

Under the constitution, new elections can’t be held before late May, leaving the country exposed to political instability for several weeks. Socrates said he will continue as head of a lame duck administration until the election, but won’t be able to take decisive action to calm markets that are expected to further batter Portuguese government bonds.

Portugal has to pay back 9 billion euros ($12.7 billion) by June 15 and in the run up to the government collapse was forced to offer 8 percent interest to persuade investors to buy its 10-year bonds, around double the rate Germany has to pay.

Estimates of how much Lisbon would need to ask from the IMF and EU start at about 60 billion euros ($84 billion).

That’s within the 440 billion euros ($620 billion) limit of the EU’s so-called Financial Stability Fund set up to save euro zone nations from monetary meltdown. But Merkel and others holding the EU’s purse strings will need to be convinced that whoever follows Socrates will accept sufficient austerity measures to merit a rescue.

The leader of the center-right Social Democratic Party, which is expected to win the elections, sought to reassure Portugal’s partners that although he’d rejected the government’s austerity program he would not shy away from tough decisions if he’s elected.

“We are all determined to confront the crisis facing Portugal,” said party leader Pedro Passos Coelho.