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Uncertainty hastens Portugal's financial tailspin

By Barry Hatton

Associated Press

Published: Monday, March 28 2011 10:20 a.m. MDT

LISBON, Portugal — Portugal's financial tailspin gathered speed Monday despite political efforts to contain the acute debt crisis that is also unnerving the 17-nation eurozone.

The interest rate on Portugal's 10-year bond surged to a new euro-era record of 7.9 percent — an unsustainable borrowing cost for the cash-strapped country.

Also, ratings agency Standard & Poor's lowered the credit worthiness of the five biggest Portuguese banks and warned it may cut the country's credit rating later this week due to political uncertainty after the government resigned last week. That development compounded Portugal's already daunting problems.

Many analysts predict Portugal will soon need a bailout like those given fellow eurozone nations Greece and Ireland. Portuguese politicians want to avoid that because it would lock the country into years of austerity policies and limit the new government's options as it carries a huge debt burden into an expected double-dip recession this year.

Though it is one of the eurozone's smallest and weakest economies, Portugal's difficulties have undermined market faith in the entire zone's fiscal soundness.

Portugal is running out of time to recoup investor trust. It faces a €4.5 billion ($6.3 billion) repayment of an existing bond in April, which officials say they can do, and then has to find €4.96 billion ($7 billion) for another repayment in June. It is not clear where the June funds will come from.

Meanwhile, political disputes have cast fresh doubts on Portugal's ability to pull out of its financial crisis. The nation faces at least two months of political paralysis just as it needs to pass a convincing debt-reduction strategy.

Portugal's minority government quit last week after opposition parties rejected its latest austerity measures, and an early election for a new government won't come until late May or early June. Plus there are constitutional questions whether an interim government even has the authority to request a bailout from the European Union and the International Monetary Fund.

"Increasing policy uncertainty, in turn, will ... further undermine the already very weak level of investor confidence, increasing Portuguese banks' funding difficulties," Standard & Poor's said Monday.

Moody's downgraded Portugal's credit rating last week.

Portugal's three largest political parties have pledged to abide by the deficit targets set by the outgoing government, an official said Monday — cutting the state budget deficit to 4.6 percent this year and to 3 percent in 2012.

However, the parties are quarreling over the best way to meet those goals. The opposition last week rejected the center-left government's proposal for more tax hikes.

The center-right Social Democratic Party, which leads opinion polls, wants deeper cuts in state spending and says it won't raise income taxes or corporate taxes.

All parties have rejected a bailout.

President Anibal Cavaco Silva, who oversees electoral issues, has been talking with political leaders to set a date for an early election. He has not yet formally accepted the resignation of Prime Minister Jose Socrates, who is expected to lead a caretaker government, nor has he dissolved parliament, which would need to give its blessing to any bailout request.

The president on Monday convened a meeting of the Council of State. The advisory body, which must be consulted before he decides to dissolve parliament, will gather Thursday afternoon.

The banks downgraded Monday were the state-owned Caixa Geral de Depositos and private institutions Banco Santander Totta, Banco Espirito Santo, Banco Portugues do Investimento and Banco Comercial Portugues.

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