Portugal casts shadow as EU leaders agree crisis package

European leaders agreed a new package of anti-crisis measures at an EU summit yesterday, but were forced to delay increasing their rescue fund and acknowledged they faced new threats from a government collapse in Portugal.

Battling to stem a debt crisis that has raged for over a year and pushed both Greece and Ireland to accept bail-outs, the European Union had promised to unveil a comprehensive solution at the summit that it hoped would reassure jittery markets.

But the abrupt resignation of Portuguese prime minister Jose Socrates on the eve of the meeting on Wednesday night, after his austerity measures were rejected by parliament, cast a long shadow. Uncertainty in other euro members, such as Finland and Ireland, also prevented leaders finalising fundamental elements of their plan.

"The euro has survived a critical test, but there is lots of homework to be done," German chancellor Angela Merkel told reporters, saying the bloc needed to "atone for past sins".

"This is a comprehensive package which I think is a big step forward. Whether it will be sufficient, only time will tell."

Yields on Portugal's ten-year benchmark bonds pushed above 8 per cent to a new record yesterday, a rate seen as unsustainable for a country which needs to refinance about €4.5 billion of debt in April and a similar amount in June.

Leaders were able to seal a deal on funding for the European Stability Mechanism (ESM), a new, permanent safety net that will become operational from mid-2013.

Ms Merkel had backtracked on a deal that would have forced Germany, Europe's biggest economy, to put up €11bn for the fund in its first year, reducing her wiggle-room for tax cuts before the next election.

Under the compromise, capital injections totalling €80bn for all eurozone members will be spread out over five years, rather than three, with smaller instalments. Eurozone leaders also formally backed the "Euro Plus Pact", a list of areas for expanded economic policy harmonisation, which has been renamed three times because of sensitivities in various member states.

In other areas. the summit fell short of expectations. Although leaders had agreed in principle this month to boost the lending capacity of their temporary safety net - the European Financial Stability Facility (EFSF) - to €440bn from roughly €250bn, they had to push this back until mid-year because of looming elections in Finland.

Portugal is widely expected to be the next eurozone domino to fall after Ireland and Greece.

Mr Socrates attended the summit despite having submitted his resignation.He made clear his continued opposition to asking for a bail-out, and said that whatever Portuguese government comes to power, it would stand by its fiscal commitments.

Portugal's president was consulting with political leaders in Lisbon yesterday to decide whether to call snap elections. If he does, they cannot be held before nearly two months have expired.

Any decision on whether to seek a bail-out may therefore only be taken in May, meaning more weeks in limbo.

Should Lisbon opt for a rescue, senior eurozone officials have said it will likely need €60-80bn from the EU rescue fund and the International Monetary Fund.

With Portugal close to the brink, attention could shift to Spain, which has gradually won back the confidence of investors by unveiling reforms, as well as a plan for shoring up its ailing savings banks.