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New Phase in Europe Crisis

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Portugal Is Seen Needing Bailout as Austerity Plan Fails, Prime Minister Resigns

By Patricia Kowsmann And Jeffrey T. Lewis

LISBON—Portugal’s parliament rejected a new government austerity plan Wednesday, spurring the resignation of Prime Minister José Sócrates and setting off a new phase in Europe’s sovereign-debt crisis.

The failure to pass the measure, after a heated debate, threatened to push already-high government borrowing costs to unaffordable levels and force Lisbon to seek a bailout.

That would make Portugal the third among the 17 nations that use the euro to apply for help from other members of the European Union and the International Monetary Fund. Greece and Ireland went first.

The events in Portugal could provide an indication of whether the euro zone’s debt travails will be contained within three small countries or begin to undermine bigger economies.

There’s plenty of money in Europe’s bailout funds to handle Portugal’s likely financing needs over the next few years, running into tens of billions of euros. However, if Portugal loses access to market finance, as now seems likely, the result may be to shift attention to Spain, the euro zone’s fourth-largest economy and the one investors have identified as its next-most-vulnerable, partly because of its weak banking system.

A senior Spanish government official said prices of Spain’s bonds and other assets may “face some temporary, speculative pressure” linked to Portugal’s woes, but, as on prior occasions of intense market volatility, “Spain will continue moving forward with its reform efforts.” These have included consolidation and recapitalization of local banks.

Portugal’s crisis will be at the forefront of the agenda of an EU summit meeting in Brussels on Thursday. European leaders have spent recent months cobbling together a comprehensive package they hope will solve once and for all the euro zone’s debt crisis.

Thursday’s meeting is expected to settle a new post-2013 bailout fund, able to lend €500 billion, or about $710 billion, and an accord to improve countries’ competitiveness. But a decision on enlarging the lending capacity of the current bailout fund beyond its roughly €250 billion has been put off.

Portugal’s Mr. Sócrates, who is expected to serve as a caretaker prime minister until a new government is formed or an election held, plans to attend the Brussels summit, though his negotiating and policy-execution powers will be very limited.

Portugal has come under quiet pressure from other European governments over several months to take a bailout, but Mr. Sócrates has resisted.

Citigroup economists said Wednesday that a vote by parliament to reject Mr. Sócrates’s austerity measures would mean rising political uncertainty that “would increase market concerns and consequently…increase the chances that Portugal will be forced to accept a formal EU/IMF bailout package.” Read more in The Wall Street Journal.

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Written by Theophyle

March 24, 2011 at 10:13 am

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