European Politics Amplify Debt Worry
The Portuguese Parliament on Wednesday moved toward rejecting further austerity measures proposed by the government, setting the stage for an early general election and raising the likelihood that Portugal’s ailing economy would require a bailout from the European Union.
Prime Minister José Sócrates had previously warned that a defeat in Parliament would prompt him to quit. A resignation by a prime minister requires President Aníbal Cavaco Silva to dissolve Parliament and call a general election, which would most likely take place in about two months.
Lawmakers had been presented with an additional austerity package — the fourth in the past year — that the government had deemed necessary to allow the country to return to fiscal health.
The events in Lisbon came on the eve of a two-day summit meeting of European Union leaders to agree on a series of measures aimed at restoring confidence in the euro. Instead, the leaders may find themselves discussing the timetable of a Portuguese bailout, which would follow that of Greece and Ireland last year.
This year, Portugal needs to borrow about €20 billion, or $28 billion, with most of that refinancing due to take place before the summer. That situation has prompted many analysts predict that the country would in any case need a bailout. Portugal’s borrowing costs has already reached a level in recent weeks that its finance minister described as unsustainable in the medium or long term.
Rui Ramos, a political analyst and professor of political history at the University of Lisbon, said: “What has really triggered this political crisis is the perception that all the efforts that were made over the past year to solve our financial problems have come to nothing and that we would not be able to avoid going the same way as Greece and Ireland. In the past weeks, everybody has simply been trying to put the responsibility for what has gone wrong on the other side.”
The Socialist government of Mr. Sócrates has been in power for six years but has been governing without a parliamentary majority. This week, the main opposition party, the Social Democrats, warned that it would oppose a further austerity package that would notably impose higher taxes on some pensioners. Instead, the Social Democrats called for a snap general election, possibly opening the door for the formation of a coalition government between Portugal’s main parties.
“The electorate is now very divided, so there is a real risk that an election will not give any party an absolute majority and bring the political clarity that we really need,” said Pedro Lomba, a lawyer and political columnist for Público, a Portuguese newspaper. “A new government must be strong enough to implement the measures that these difficult financial circumstances require.”
In recent weeks, the yield on Portugal’s benchmark 10-year bonds has stayed above 7 percent — a level that the finance minister, Fernando Teixeira dos Santos, told lawmakers this month would prove unsustainable for Portugal in the medium and long term. On Wednesday, the yield stood at 7.4 percent, close to its record high.
The government had insisted that a further austerity package, blending spending cuts with tax changes, would be sufficient to avoid emergency financing and instead meet the government’s goal of cutting its budget deficit from an estimated 7.3 percent of gross domestic product last year to 4.6 percent this year. Portugal has been among a handful of euro nations in investors’ line of fire for the past year after posting a record deficit of 9.3 percent in 2009.
The Socialists laid the blame on the opposition Socialist Democrats for escalating tensions just ahead of an E.U. summit meeting to help ailing euro economies like Portugal avoid emergency funding.
Portugal’s economic outlook has been worsening. It is struggling with a record unemployment rate of 11.2 percent, and the Bank of Portugal recently forecast that the economy would contract 1.3 percent this year. The government’s plan prompted hundreds of thousands of Portuguese to take to the streets this month.
Under the Constitution, an early election can be held 55 days after it is called by the president. In the interim, the Socialists are expected to continue to lead a caretaker government, but with little room to take further legislative initiatives.
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European Politics Amplify Debt Worry
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European countries cant manage crisis at all