Austerity Debate Fells Portugal’s Premier
Friday, March 25, 2011 at 01:56AM
Gold Prices in Gold, Other
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Another European government fell victim to the politics of austerity on Wednesday when the prime minister of Portugal resigned after opposition parties rejected his last-ditch attempt to push through a package of spending cuts and tax increases.

The failure of Prime Minister José Sócrates to complete a fourth round of painful financial measures within a year led to the government’s collapse and pushed the nation closer to a bailout from Europe and the International Monetary Fund.

Because its financing in the bond markets has become so costly, Portugal is expected to become the third country in the euro zone to be forced to accept public funds, following Greece and Ireland. It is a blunt reminder that last year’s debt crisis has not gone away. Ireland’s government also collapsed after its tough austerity measures failed to persuade investors to provide it financing at affordable rates.

The euro slid against the dollar after the announcement on Tuesday. European leaders were preparing to meet at the end of the week to discuss bolstering their rescue fund and the possible prospect of further bailouts.

Though the financial markets have long anticipated that Portugal would need assistance, that its government had to fall first sends a dire warning to other European economies like Spain, Greece and Britain. Those countries are trying to persuade impatient voters to accept reduced public services, lower wages for government workers and higher taxes.

As they did earlier in Greece and Ireland, protesters have taken to the streets in bitter opposition to the Portuguese government’s program.

“The opposition removed from the government the conditions to govern,” the prime minister said in a televised address. With this vote by Parliament, he added, “I am convinced that Portugal today has lost, rather than won.”

The collapse of Portugal’s government comes at a particularly awkward time for theEuropean Union. An attempt to increase the size of the union’s 440-billion-euro rescue fund has been resisted by more prosperous European countries like Finland and Germany.

Europe’s leaders are set to meet on Thursday and Friday to complete plans for broadening this fund — a step aimed at giving investors confidence that Europe is prepared to handle more emergencies not just in Portugal, but perhaps also Spain.

Once again, however, tensions among Europe’s faster-growing economies and its debt-plagued periphery is creating a bureaucratic paralysis, feeding investor fears that divisions on the Continent have not yet healed.

Portugal needs to borrow about 20 billion euros this year, with most of that refinancing to be done before the summer. Many analysts have been predicting an imminent bailout because Portugal’s borrowing costs have reached a level in recent weeks that its finance minister described as unsustainable in the medium or long term.

“What has really triggered this political crisis is the perception that all the efforts that were made over the past year to solve our financial problems have come to nothing and that we would not be able to avoid going the same way as Greece and Ireland,” said Rui Ramos, a political analyst and professor of political history at the University of Lisbon.

Ahead of the vote, Mr. Sócrates had warned that parliamentary rejection of his latest austerity measures would prompt him to quit. The main Social Democratic opposition party, however, had warned it would oppose an austerity package that would inflict further pain on Portuguese citizens, notably by raising taxes for pensioners.

Instead, the Social Democrats demanded a snap general election, possibly opening the door for the formation of a coalition government between Portugal’s main parties.

In the end, lawmakers from all five opposition parties rejected further austerity measures, leaving 97 Socialist lawmakers to vote in favor the plan, out of 230 members of Parliament. The Socialist government of Mr. Sócrates had been in power for six years, but was governing without a parliamentary majority.

It will now be the president’s task to dissolve Parliament and call a general election, probably in about two months.

“The electorate is now very divided, so there is a real risk that an election will not give any party an absolute majority and bring the political clarity that we really need,” said Pedro Lomba, a lawyer and political columnist for Público, a Portuguese newspaper. “A new government must be strong enough to implement the measures that these difficult financial circumstances require.”

In recent weeks, the yield on Portugal’s benchmark 10-year bonds has stayed above 7 percent — a level that Fernando Teixeira dos Santos, the finance minister, told lawmakers earlier this month would prove unsustainable for Portugal in the medium and long term.

The government had said that a further austerity package — blending spending cuts with tax changes — would be sufficient to avoid emergency financing and meet the government’s goal of cutting its budget deficit from an estimated 7.3 percent of gross domestic product last year to 4.6 percent this year. Portugal has been among a handful of euro nations in investors’ line of fire for the last year after posting a record deficit of 9.3 percent in 2009.

This week, the Socialists laid the blame on the opposition Socialist Democrats for escalating tensions just ahead of a European Union summit meeting that was supposed to help ailing euro economies like Portugal avoid emergency financing.

Concerns had been growing about Portugal’s economic outlook. Portugal is struggling with a record unemployment rate of 11.2 percent, and the Bank of Portugal recently forecast that the economy would contract 1.3 percent this year. Further, the government’s plan prompted hundreds of thousands of Portuguese to take to the streets this month, as evidence of rising social unrest.

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