Portugal moves closer to bailout

THE PROSPECT of Portugal avoiding an EU-IMF bailout receded further as its minority Socialist government teetered and Moody’s downgraded its debt.

The country’s social democrat opposition is refusing to back new austerity measures championed by Prime Minister Jose Socrates and the European authorities.

The standoff has led Mr Socrates and finance minister Fernando Teixeira dos Santos to warn that any failure to agree a new round of budget cuts next week could plunge it into an external intervention.

“Failure to approve the new measures in the budget plan would push the country to external help,” Mr dos Santos told a parliamentary committee.

“Current market conditions are unsustainable in the medium and long term.”

Although the European Commission decline yesterday on the political turmoil, there is mounting anxiety in Brussels that the country may soon have to follow Ireland and Greece into a bailout.

The tension may culminate next week at an anticipated vote on the new measures. This takes place days before EU leaders gather to discuss an overhaul of the euro bailout fund.

The new austerity measures, but the latest in a long line of reform plans, have met with approval from the Commission and EU leaders generally.

Portugal has been in the line of fire for months, and for a considerable period last year was seen to be a more vulnerable position than Ireland.

The latest drama was compounded when Moody’s cut Portugal’s sovereign debt rating by two notches to A3 and declared it might have to downgrade again given the impact of high borrowing costs and the difficulty of meeting stringent fiscal targets.

Portuguese borrowing costs rose again and its plight weighed on European bank stocks. BNP Paribas, Banco Santander, BBVA, Intesa SanPaolo and Société Générale fell between 2.6 and 5.4 per cent.

While Spain secured lower yields at a bond auction, the yield on €1 billion of 12-month Portuguse treasury bills increased to 4.331 per cent at the auction, compared with 4.057 per cent two weeks ago.

Lisbon had hoped that an anticipated deal to expand the scale and scope of the euro zone bailout fund would take some of the pressure off the country.

However, the expected reforms fall short of the radical measures that Mr Socrates had hoped for. Any deal may now come too late for the country, which acknowledged several days ago that it could not sustain the borrowing costs it now faces.

Mr Socrates warned two days ago that his administration government would be unable to continue if the country’s long-term economic strategy was not passed in parliament.

The Social Democrats have so far supported the governments austerity measures.

Mr Teixeira dos Santos urged them to negotiate.

However, local analysts fear an agreement may be all but impossible, leading to a collapse of the Socrates government and elections.

If it falls, it would be the second European government after the Fianna Fáil administration to be felled by the financial crisis.

Euro zone minister ministers gather next Monday to hammer out final arrangements for the overhaul of the fund.