EU SUMMIT:THE RESIGNATION last night of Portuguese prime minister Jose Socrates heightened anxiety on the eve of crucial European summit that the country would soon have to follow Ireland and Greece into an EU-IMF bailout.
As parliament in Lisbon rejected a new austerity plan amid huge pressure on the country’s borrowing costs, there was open speculation in Brussels that Portugal’s hopes of averting an international intervention were fading rapidly.
The likelihood of a new euro zone bailout could have implications for Ireland’s dialogue with the EU authorities over the bank and interest rate on Ireland’s rescue loans.
A senior European diplomat said the development of a rescue programme for Portugal could provide scope to revisit the Irish deal, particularly the elements related to the banks.
Dublin wants to slow down the pace of bank deleveraging set out in its rescue programme and to persuade the European Central Bank (ECB) to move from the provision of emergency short-term liquidity support to medium-term support.
Mr Socrates met President Anibal Cavaco Silva late last night and offered him his resignation. “This political crisis has very grave consequences for the confidence Portugal needs from institutions and the financial markets,” Mr Socrates warned.
The president said in a statement that he would hold meetings with all parties on Friday and that the government would retain full powers at least until then.
The political drama in Lisbon has added huge pressure on EU leaders as they gather for a two-day summit in Brussels at which they were to sign off on a big overhaul of the euro zone bailout scheme.
Adding to the tension were German jitters over the schedule for capital payments into a new permanent rescue fund, the European Stability Mechanism (ESM), and Finland’s refusal to provide new guarantees to the temporary European Financial Stability Facility (EFSF) fund until after elections next month.
This means the final legal arrangements to set the overhaul in stone cannot be made until June.
Set against EU leaders’ self-imposed deadline of tomorrow for a far-reaching “grand bargain” to finally bring the sovereign debt emergency to heel, the increasing prospect of a third euro zone bailout now threatens to overshadow their efforts to renew confidence in their determination to overcome the crisis.
The pressure on Portugal is all the more intense because it must refinance bonds worth some €9 billion in April and June, meaning any caretaker government faces an immediate threat of crippling borrowing rates.
There are doubts, however, that such an administration would have legal powers to request external aid or to negotiate stringent policy conditions in any EU-IMF programme.
In addition, said a senior European diplomat, parliament’s rejection of the austerity measures cast clear doubt on any caretaker government’s capacity to insert similar policies into any rescue programme.
However, high-level EU officials insist that ways can be found to ensure the country’s stability if required. The official also pointed out that Belgium’s caretaker administration was engaged in military action against Libya.
Portuguese finance minister, Fernando Teixeira dos Santos, opened the parliamentary debate, stating that a refusal to approve the new austerity measures “will provoke an immediate rise in the country’s risk and immediate consequences in terms of credit ratings”. Mr Socrates sat through his speech but then left parliament.
Each of the opposition parties had stated their objection to the measures, which reduce pensions and state spending. These included the main opposition Social Democrats, who previously supported austerity.
“If all these positions that now seem irreversible are confirmed, then yes \,” said Socialist parliamentary leader Francisco Assis.
Mr Socrates had indicated he would travel to Brussels for the summit regardless of the vote outcome. Under the Portuguese constitution, the country can hold a snap election no sooner than 55 days after the president calls one.