MercoPress. South Atlantic News Agency

Portugal has Euro zone on the brink; bail out package considered at EU summit

PM Jose Socrates resigned following Parliament’s rejection of austerity budget.

EU leaders are grappling with a new Euro zone threat after Portugal's parliament rejected an austerity budget and PM Jose Socrates resigned. The vote means an international bail-out, similar to those accepted by Greece and the Irish Republic last year, is now far more likely.

Mr Socrates said opposition parties had “removed from the government the conditions to govern”. The EU summit in Brussels is aimed at tackling the Euro zone debt crisis.

Although the situation in Libya and recent events in Tunisia and Egypt are high on the agenda, the summit has been billed as the moment the 27 EU member states adopt a “comprehensive package” on stabilising the Euro zone.

As part of the deal, the lending capacity of the European Financial Stability Facility (EFSF) would be raised from 250bn Euros to 440bn Euros. The EFSF is due to be replaced by a permanent European Stability Mechanism in 2013.

But EU governments have not yet nailed down their national contributions to the augmented EFSF and Portugal's uncertain politics makes unanimity more difficult.

Pressure on Portugal's economy intensified on Thursday as the interest rate on the country's 10-year bonds climbed to a new high of 7.91%.

Portugal faces bond repayments of 4.3bn Euros on 15 April and, in a national address on Wednesday night, Mr Socrates warned that the political crisis would have “very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets”.

The Fitch rating agency downgraded Portugal's sovereign credit rating from A+ to A- on Thursday.

Belgian Finance Minister Didier Reynders said that Portugal's partners were ready to offer their help, if requested.

“I have always thought that it would be useful to organise aid, simply because that allows [Portugal] to pay less interest on its debt while undergoing restructuring, and therefore make fewer demands, sometimes onerous ones, on [its] people,” he said in Brussels on Thursday.

“If Portugal asks, we will be ready to intervene. For that to happen, there will need to be a plan to bring its finances back to better health and a request to unlock European funds.”

A bail-out for Portugal could total about 80bn Euros, analysts say.

In a speech to the German parliament (Bundestag) on Wednesday, Chancellor Angela Merkel said it was “regrettable” that Portuguese MPs had rejected the government's proposed package of spending cuts and tax rises.

Praising Mr Socrates' efforts as “courageous”, Mrs Merkel said: “What is needed is a consistent path of consolidation and reform. Yesterday showed how difficult this is.”

All five Portuguese opposition parties rejected the austerity measures - the government's fourth set of proposals in a year - arguing they went too far.

Although he resigned on Wednesday, Mr Socrates is attending the EU summit as caretaker prime minister. A snap election is now considered most likely, but the decision will be made by Portuguese President Anibal Cavaco Silva.

Lisbon has argued its situation is different from Greece and the Irish Republic - both of which have agreed to bail-outs from the EU and the IMF. It says that its deficit and debt are lower than those nations, that it has not suffered a bubble in property prices and that its banks are sound.

Arriving at the summit on Thursday the new Irish Prime Minister, Enda Kenny, said he would wait for the results of stress tests on Irish banks before renegotiating the terms of the 85bn-Euro bail-out granted to Dublin in December. The results are expected on 31 March.

Dublin requested the EU-IMF help after pouring billions of Euros into heavily indebted Irish banks, but it wants to get the interest rate on the bail-out reduced.