Early election gamble further weakens Portugal

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Portugal saw its credit ranking downgraded by two notches yesterday (16 March), after the country's Prime Minister José Sócrates warned earlier this week that if his cabinet were to fall over proposed austerity measures, the country would have to seek a bailout from the EU.

Sócrates said his minority government would be unable to continue if the country's long-term economic strategy, which includes the latest austerity measures, were not passed in parliament (see 'Background'). This, according to the Portuguese media, would result in the fall of the cabinet.

Portugal's plight has become yet more complicated by the fact that the main opposition Social Democrats (European People's Party-affiliated) have refused to back the government's latest austerity plans, which aim to ensure that the country meets its budget goals.

Sócrates has long resisted growing investor and peer pressure to request an international bailout to ease its debt crisis, at least on the terms that were imposed on Greece and Ireland. He hopes an austerity drive will convince markets the country can solve its problems on its own, helping to push borrowing costs lower from euro lifetime highs.

"Failure to approve the new measures in the budget plan would push the country to external help," Finance Minister Fernando Teixeira dos Santos told parliament's budget committee. "Current market conditions are unsustainable in the medium- and long-term."

So far in the eurozone debt crisis, the Social Democrats have supported the government's austerity measures and Teixeira dos Santos urged the opposition party to negotiate.

But analysts increasingly think the political standoff could lead to a collapse of the Socialist government.

"José Sócrates has played his last dramatic card," said daily Diário de Notícias in an editorial. "But this time it appears the Social Democrats are not ready to dance."

The daily Jornal de Negócios yesterday quoted Sócrates as saying that he would run again for office in the case of early elections.

But since the Social Democrats now have a lead in opinion polls they may try to push the government out by making it unable to pass legislation and prompt a snap election.

Pressure on Lisbon mounted after Moody's credit rating agency downgraded Portugal by two notches late on Tuesday, highlighting the challenges it faces it in riding out its debt crisis.

The yield on 1 billion euros of 12-month treasury bills rose to 4.331% at the auction, compared with 4.057% two weeks ago.

Spain, by contrast, obtained lower yields at a T-bill auction on Tuesday and is viewed as less and less likely to need an EU/IMF bailout following a surprisingly strong package of debt measures agreed by eurozone leaders.

The worsening financing situation for Portugal – which many economists say is the next likely eurozone country to need a bailout after Greece and Ireland – suggests the deal by eurozone leaders at the weekend to boost their rescue fund may have come too late for it.

(EURACTIV with Reuters.)

At their 11 March summit, eurozone leaders clear the way for an agreement to increase the EU's rescue facility to 440bn euros from its current level of around 250 billion.

Leaders agreed they would increase the guarantees they provide to the bailout fund to allow it to raise capital on international markets. This should ensure that the fund is capable of bailing out any eurozone states beyond Greece and Ireland that require assistance.

Portugal is seen as the country next most likely to need financial help. Spain may follow after that.

Portugal announced additional spending cuts and reforms on Friday to cut its fiscal deficit in an attempt to stave off intense pressure to seek a bailout, Reuters reported.

The plan targets an impact on the budget deficit of 0.8% of gross domestic product this year, the finance ministry said, but it did not revise its year-end deficit forecast of 4.6%, saying the new measures would bring added certainty that the goal is met.

These and other measures are designed to reach a 2% deficit goal in 2013, below the 3% threshold set by Brussels, as outlined by the government last year [more].

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