Portugal's PM quits after debt-cutting plan nixed

By Barry Hatton

Associated Press

Published: Wednesday, March 23 2011 12:00 a.m. MDT

Portuguese Prime Minister Jose Socrates, left, and Finance Minister Fernando Teixeira dos Santos wait the start of the debate of his minority government's latest austerity package Wednesday, March 23 2011, at the Portuguese parliament in Lisbon. If lawmakers fail to back the package the government could fall putting Lisbon into political limbo just as it faces huge debt repayment deadlines and desperately needs markets' confidence.

Armando Franca, Associated Press

LISBON, Portugal — Debt-stressed Portugal's prime minister quit Wednesday after opposition parties scuppered his latest austerity measures devised to avoid a bailout that looks increasingly likely.

All opposition parties united to defeat Prime Minister Jose Socrates' proposals in a parliamentary vote, saying the belt-tightening went too far.

"The opposition (parties) took away the government's ability to continue running the country. As a consequence, I have tendered my resignation to the president," Socrates said in a televised statement.

In accordance with constitutional procedure the prime minister presented his resignation to the head of state, who is mostly a ceremonial figurehead and has no executive powers, before announcing it publicly. His resignation also ended the center-left Socialist government's six-year period in power.

The government's latest austerity package was its fourth set of measures in 11 months as Portugal has scrambled to avoid the embarrassment and financial consequences of asking for outside help. It has introduced tax hikes and pay cuts that have angered trade unions and prompted a wave of street demonstrations and strikes.

Portugal's problems could thwart efforts by European leaders to persuade nervous investors that all is well in the eurozone, including Portugal. It could launch another spell of market turbulence for the bloc and doom Lisbon to accepting financial assistance like Greece and Ireland last year.

European leaders hope to soothe nervous international investors at a two-day summit starting Thursday. Socrates is scheduled to attend the meeting.

"This crisis comes ... at the worst possible time — ahead of a summit that's decisive for Portugal and decisive for Europe too," Socrates said.

He said the political crisis would entail "deeply negative consequences" for Portugal, one of the 17-nation eurozone's smallest and frailest economies.

The opposition's rejection of his plan increased the probability of Portugal asking for outside help which would entail "much tougher measures" than those he proposed and which had won the backing of European leaders, Socrates said.

Foreign financial assistance comes with strings attached, including a role for the International Monetary Fund which strips away government control of key fiscal policies for years, making it a last resort for cash-strapped countries.

Socrates said his government had done all it could to avert a bailout "so we wouldn't end up in a situation like Greece or Ireland" where fiscal measures imposed by the bailout terms have squeezed the finances of families and companies.

A bailout would be "deeply negative for the image, prestige and reputation of the country," Socrates said.

Debt woes, and differences over how to tackle them, also brought down Ireland's government earlier this year after it accepted a bailout, forcing an election that was won by the main opposition party.

The government's downfall set Portugal, a country of 10.6 million people, adrift just as it is trying to restore its fiscal health.

President Anibal Cavaco Silva said in a statement he will meet with all political parties on Friday to decide the way forward.

A new election consigns Portugal to at least two months of unwelcome political paralysis.

Many analysts expected the government's resignation to lead to elections in May or June. The outgoing administration will remain in power as a caretaker government.

Socrates resignation, and by procedure that of the government, was expected after days of political tension but will likely re-ignite market anxiety about the financial soundness of the wider eurozone.

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