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Portugal seeks new govt amid debt crisis

By Barry Hatton

Associated Press

Published: Friday, March 25 2011 10:15 a.m. MDT

A woman walks in a nearly deserted Santa Apolonia train station in Lisbon during a railway workers strike Friday, March 25, 2011. Portugal is rudderless and at the mercy of financial markets after the government quit in a dispute with its rivals over debt reduction proposals. Many analysts expect the uncertainty to push Portugal into taking a bailout like Greece and Ireland.

Armando Franca, Associated Press

LISBON, Portugal — Portugal's president sought to broker a deal between rival parties Friday to give the debt-stressed country a new government as it is engulfed by a financial crisis and edges toward an unwanted bailout.

President Anibal Cavaco Silva, largely a figurehead, was asking parties during a series of meetings whether they would voluntarily form a coalition government — which would remove the need for an early election — or if they preferred a ballot.

Portugal is rudderless and at the mercy of financial markets after the Socialist government quit Wednesday when the opposition refused to back its new austerity measures. The former government had been strenuously resisting market pressures for a bailout but June is likely to bring a financing crunch that could force Portugal to ask for a rescue package.

Officials from three smaller parties who went to the president's riverside "pink palace" Friday all said they preferred early elections in early June. The two largest parties, the center-left Socialists and center-right Social Democrats, were widely expected to follow suit later in the day.

That would likely defer any bailout request to the European Union and the International Monetary Fund until early summer, after the election puts a new government in place.

That sets up a problem, because the outgoing government says Portugal has enough cash to meet a €4.5 billion ($6.4 billion) bond repayment next month, but there is uncertainty about whether it will have enough for a €4.9 billion ($6.9 billion) debt due in June.

Portugal is one of western Europe's poorest countries. A decade of anemic growth during which Portugal ran up high debts has spooked markets, sending its borrowing costs higher and hastening its economic decline. Though Europe's bailout fund is able to come up with the about €75 billion that analysts estimate Portugal may need, the country's woes have contributed to investor fears about the 17-nation eurozone's financial soundness.

Before Cavaco Silva can set an election date, he must consult political parties and also confer — probably next week — with the Council of State advisory panel.

Neither of the country's two dominant parties want to ask for outside financial help like Greece and Ireland, two other eurozone countries, were forced to accept last year. Governments are reluctant to accept bailouts because they lock the country into tight fiscal policies for years and lower living standards.

"Portugal doesn't need any help," outgoing Socialist Prime Minister Jose Socrates said Friday, insisting that his own policy of tax hikes and pay cuts would reduce the country's high debt burden and restore investor faith.

"I know what (a bailout) would mean. I know what it meant for the Greeks and the Irish and I don't want that for my country," he said at a European summit in Brussels.

Portugal's budget deficit hit a record 9.3 percent of gross domestic product in 2009. That was the fourth-highest level in the eurozone and alarmed markets which have made Portugal pay unsustainably high interest rates for what are viewed as risky loans.

Socrates says his latest austerity plan — which opposition parties rejected — would drive the deficit down to 4.6 percent this year.

The Social Democratic Party agrees on the need for deficit-cutting measures but said the government's latest package went too far.

Even without assistance, austerity measures are likely to remain in place for years, choking one of the eurozone's smallest and feeblest economies and deepening public anger. A 24-hour train strike Friday shut down the national rail network — the latest action by disgruntled public employees.

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