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Portugal gov't nears collapse amid debt crisis

By Barry Hatton

Associated Press

Published: Monday, March 21 2011 9:46 a.m. MDT

LISBON, Portugal — Just as Portugal appeared to have dodged a bailout like those taken by Greece and Ireland, a domestic political spat was set Monday to worsen its financial troubles and possibly spoil Europe's efforts to put the sovereign debt crisis behind it.

Portugal's main opposition parties told the beleaguered minority government they won't budge from their refusal to endorse a new set of austerity measures designed to ease a huge debt burden that is crippling the economy.

The new steps are likely to be rejected in a parliamentary vote expected Wednesday and the timing could not be worse. A defeat in the vote, Prime Minister Jose Socrates warned, would trigger his government's resignation, consigning Portugal to at least two months of political limbo just as officials were hoping to boost investor confidence in the country's future.

"At this point, a political crisis is a big push towards the country resorting to outside help," Finance Minister Fernando Teixeira dos Santos said.

The national political crisis also threatens to set back Europe's broader plan to stamp out the debt market jitters — leaders at a two-day summit starting Thursday will seek to ratify key changes to the bloc's rescue fund and spare Portugal the need to surrender policy decisions to outside authorities through a bailout.

The new European policy would allow the fund to purchase government debt, easing market pressure which has driven the borrowing costs of weak countries to unsustainable levels. European leaders hope the response will herald the end of the debt crisis that has dragged on for more than a year.

That deal, however, was contingent on Portugal implementing the austerity measures that are unlikely to survive the country's political standoff.

Portugal's center-left Socialist government, which has insisted it doesn't want or need a bailout, won the backing of the European Central Bank and the European Commission for that new austerity plan. The ECB has already been helping Portugal by buying its government debt and providing funds to its banks.

With the austerity plan at risk, Portugal's political woes are likely to sow fresh uncertainty among investors who are nervous about the 17-nation eurozone's fiscal soundness and prospects for economic recovery. The big worry is that the high borrowing costs will continue to erode confidence and economic growth and eventually threaten the stability of much larger debt-heavy nations such as Spain, Belgium and Italy.

"We think Portugal will eventually need to request a bailout," said Emilie Gay, analyst at Capital Economics.

The Portuguese government's insistence that it can find its own path out of its difficulties "are not very credible any more," she said.

Portugal has to find cash to meet bond repayments amounting to almost €9.5 billion ($13.48 billion) falling due in April and June. It has had no trouble raising money on markets so far, but it needs to lower steep borrowing costs that are pushing it into a downward spiral. The yield on its 10-year bond, for example, was at 7.4 percent on Monday — not far from euro-era records.

The debt market jitters are more than concerns for investors or governments — they have a real economic impact on a country and its people because they imply savage austerity measures. As in Greece and Ireland, standards of living plummet as the economy readjusts to lower wages and prices to become more competitive.

Portugal is following a similar path. Its scrawny economy has posted average annual growth of less than 1 percent over the past 10 years. During that time, it amassed massive foreign debt to finance its western European lifestyle.

The main opposition party, the center-right Social Democrats, agrees the country must reduce its debt load and has consented to previous austerity measures including tax hikes and pay cuts.

But it said the government's latest austerity plan — the fourth set of measures in 11 months — goes too far because it hurts the weaker sections of society.

Among the measures is a freeze on old-age pensions which Social Democrat leader Pedro Passos Coelho described Monday as "deeply unfair."

The government has offered to negotiate changes to the package, but the opposition parties say they no longer trust the government because it didn't consult them before presenting the measures to European authorities earlier this month.

Minister for Parliamentary Affairs Jorge Lacao said the deadlock would have "very grave consequences" for Portugal.

The austerity measures have prompted a wave of strikes and street demonstrations. Workers with the national rail company and the Lisbon subway are due to walk off the job later this week.

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