Portugal set to enter EU/IMF bailout fund

PORTUGAL looks set to follow Ireland into the EU/IMF bailout fund after its parliament voted against another round of austerity measures aimed at averting such a bailout.

Following the vote Prime Minister José Sócrates offered his resignation, although his government will remain in power in caretaker capacity.

The situation in Portugal could stall national and European efforts to deal with the continent’s protracted debt crisis.

The vote came 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.

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

The political tension fuelled a rise in Portugal’s borrowing rates, just as it is trying to cut spending. The yield on the country’s 10-year bond, for example, was up to 7.57% on Tuesday — just shy of its euro-era record level. The interest rate has been above 7% for several weeks despite the government’s earlier austerity measures which, its political rivals say, failed to quell investor fears.

As in Greece, the austerity policies — including tax hikes and pay cuts — have prompted an outcry from unions and numerous demonstrations and strikes. Train engineers walked off the job during the morning commute yesterday, causing widespread travel disruption.

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.

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

The government’s austerity measures have won praise from other European countries, but Portugal urgently needs to generate fresh growth.

The economy is in deep trouble, with a double-dip recession expected this year and unemployment standing at a record 11.2%. Moody’s recently downgraded the country’s credit rating, and Standard & Poor’s has warned it may follow suit.

Portugal’s plight stems from a decade of miserly growth. While growing at 1% a year, it ran up debt to finance its western European lifestyle. Its economy is hobbled by old-fashioned practices, especially outdated labour laws which protect jobs, and has failed to keep pace with more flexible competitors.