EU SUMMIT:EUROPEAN DIPLOMATS say Portugal will not apply for a bailout programme in advance of any election in the country, setting up a testing battle on markets in the run up to a crucial bond redemption next month.
As EU leaders confronted a new turn in the debt crisis after the resignation of prime minister José Sócrates, they urged the country to continue with the austerity measures rejected by its parliament on Wednesday night.
The political crisis in Portugal overshadowed a European summit in Brussels at which EU leaders had hoped to present a “grand bargain” deal to finally resolve the sovereign debt crisis.
Amid open speculation in Brussels that Portugal might need a €75 billion package in any EU-IMF rescue, a succession of European leaders called for clarity about the country’s situation.
Mr Sócrates, whose resignation has yet to be accepted by President Anibal Cavaco Silva, arrived in Brussels insisting there would be no bailout. But euro group chief Jean-Claude Juncker said he did not exclude that possibility.
Mr Cavaco Silva convenes meetings today with leaders of all Portuguese political parties, and this is likely to lead to a general election. Such a poll cannot take place for 55 days, leaving Portugal in a precarious position with the repayment of a €4.23 billion bond due in the middle of next month.
Mr Sócrates, who would stand in the election, would remain in office in a caretaker capacity during the campaign. Diplomats said it was widely accepted it would be politically damaging for him to seek a bailout in that scenario, making it very unlikely he would do so.
This presents an increasing risk that a caretaker government might be shut out of markets as big debts fall due. Further uncertainty surrounds the power of a caretaker administration to put a vote on a rescue package to parliament in an election period. However, many diplomats and officials in Brussels now believe a bailout to be inevitable.
Pressure piled on the country as its borrowing costs rose yet again to record levels and rating agents at Fitch downgraded its debt. Fitch said it assumes Portugal will be unable to maintain affordable market access and saw an increased risk of the country requiring external support.
German chancellor Angela Merkel said she regretted the Portuguese parliament’s rejection of Mr Sócrates latest austerity plan, which prompted the prime minister’s resignation.
Portuguese opposition leader Pedro Passos Coelho, seen as a likely successor to Mr Sócrates, said it was impossible to say if Portugal would require a bailout.
He rejected Dr Merkel’s criticism, saying he hoped EU leaders understood that a weak government was the “worst thing” that could happen a country.
