Fresh debt crisis pushes Portugal's government closer to collapsing

PORTUGAL'S political crisis deepened last night, with the prospect of the government failing, as opposition parties told the beleaguered minority administration that they would not endorse a new austerity measures to ease a huge debt burden crippling the economy.

The new steps are likely to be rejected in a parliamentary vote expected tomorrow and the timing could not be worse. Prime minister Jose Socrates has warned that a defeat would trigger his government's resignation, consigning Portugal to at least two months of political limbo just as officials were hoping to boost investor confidence in the country's future.

Finance minister Fernando Teixeira dos Santos said: "A political crisis is a big push towards the country resorting to outside help."

The crisis also threatens to set back Europe's broader plan to stamp out market jitters - leaders at a two-day summit starting on Thursday will seek to ratify key changes to the bloc's rescue fund and spare Portugal the need to surrender policy decisions to outside authorities through a bailout.

The new European policy would allow the fund to purchase government debt, easing market pressure, which has driven the borrowing costs of weak countries to unsustainable levels.

European leaders hope the response would herald the end of the debt crisis, which has dragged on for more than a year. That deal, however, was contingent on Portugal implementing the new austerity measures.

Portugal's centre-left Socialist government, which has insisted it doesn't need a bailout, won the backing of the European Central Bank and the European Commission for its new austerity plan. The ECB has already been helping Portugal by buying its government debt and providing funds to its banks.

With the austerity plan at risk, Portugal's political woes are likely to sow fresh uncertainty among investors nervous about the 17-nation eurozone's fiscal soundness and prospects for economic recovery.

The big worry is that the high borrowing costs will continue to erode confidence and economic growth and eventually threaten the stability of much larger debt-heavy nations such as Spain, Belgium and Italy.

"We think Portugal will eventually need to request a bailout," said Emilie Gay, an analyst at Capital Economics.

The Portuguese government's insistence that it can find its own path out of its difficulties "are not very credible any more," she said. Portugal has to find cash to meet bond repayments amounting to almost €9.5 billion (8.3bn) which are due in April and June.

It has had no trouble raising money on markets so far, but it needs to lower steep borrowing costs that are pushing it into a downward spiral.Debt market jitters are more than concerns for investors or governments - they have a real impact on a country and its people because they imply savage austerity measures. As in Greece and Ireland, standards of living plummet as the economy readjusts to lower wages and prices become more competitive.

Portugal is following a similar path. Its scrawny economy has posted average annual growth of less than 1 per cent over ten years, while it amassed massive foreign debt to finance its western European lifestyle.

The main opposition party, the centre-right Social Democrats, agrees the country must reduce its debt load and has consented to previous austerity measures, including tax hikes and pay cuts. But it said the latest austerity plan - the fourth set of measures in 11 months - goes too far because it hurts the weaker sections of society.

The cuts have prompted a wave of strikes and protests. Workers with the national rail company and the Lisbon subway are due to take action this week.