Portugal in crisis over bailout fears

Portugal’s government could collapse today after opposition parties withdrew their support for another round of austerity policies aimed at averting a financial bailout.

The expected defeat of the minority government’s latest spending plans in a parliamentary vote will likely force its resignation and could stall national and European efforts to deal with the continent’s protracted debt crisis.

The vote comes on the eve of a two-day European Union summit where policymakers are hoping to take new steps to restore investor faith in the fiscal soundness of the 17-nation eurozone, including Portugal.

Last year, both Greece and Ireland had to accept multibillion euro rescue packages after markets lost faith in their governments’ efforts to deal with their debt burdens.

By most measures, Portugal is one of the eurozone’s smallest and feeblest economies but its financial collapse would likely trigger a fresh bout of nerves over other debt-heavy – and bigger – euro countries such as Spain, Belgium and Italy.

“Portugal seems very likely to become the third ... eurozone country to need a bailout,” Emilie Gay, European economist at Capital Economics said.

The governing Socialist Party’s parliamentary leader Francisco Assis made an 11th-hour appeal for opposition rivals to negotiate changes to the latest austerity package and ensure the government’s survival.

Prime minister Jose Socrates, who heads the government, has said he will no longer be able to run the country if the package is rejected.

“This is a decisive moment,” Mr Assis said yesterday.

Finance Minister Fernando Teixeira dos Santos has said failure to enact the package – the fourth set of measures in 11 months – would push Portugal closer to needing financial assistance.

But opposition parties say the centre-left government’s latest austerity plan goes too far because it hurts the weaker sections of society, especially pensioners who will pay more tax.

The package also introduces further hikes in personal income and corporate tax, broadens previous welfare cuts and raises public transport fares.

The leader of the main opposition centre-right Social Democratic Party, Pedro Passos Coelho, said that the political deadlock made an early election “inevitable”.

Markets have heaped pressure on Portugal over the past year as investors demanded ever higher returns for lending it money, driving the country’s borrowing costs to intolerable levels.