Portugal’s government is in danger of collapse as the country’s opposition parties oppose another austerity package, a move that could force the country to seek a bailout from the rest of Europe and the International Monetary Fund.
According to media reports, the situation in Portugal came to a head last night.
The Financial Times reported:
"Portuguese opposition parties have refused to back austerity measures drafted to help the country avoid a bail-out, in a rebuff that could trigger both a snap election and an international financial rescue.
"The political crisis in Lisbon threatens to dominate a European Union summit on Thursday, at which leaders hope to finalise “a grand bargain” to resolve the eurozone debt crisis.
"Portugal’s cost of borrowing hit new euro-eras highs on Tuesday, with the yield on five-year government bonds rising above 8 per cent for the first time."
The Opposition parties subsequently combined to reject the austerity plan and the Prime Minister, Jose Socrates was due to address the country in a TV speech this morning, Sydney time.
He has already said he cannot government without the austerity plan, and the country needs it to maintain tenuous support from worried investors.
This adds to the pressure on the two-day EU summit on tonight and tomorrow night, our time. That’s due to resolve the bailout and support packages for the eurozone could be thrown into doubt, which would in turn concern financial markets and see the euro sold off.
There is already increasing doubt about this summit with the news that Finland, a Triple A rated economy, might not ratify the agreement because the political tide has turned against such support at home.
Finish support is needed because its strong credit rating (it is one of only six AAA rated countries in the eurozone) will help the bailout and financing mechanism to work. Europe can drop Finland, but that will require more money from Germany (very hard) and France in particular.
The Finnish government is under pressure from rightwing parties opposed to any more bailout support; that saw Finland object to parts of the deal agreed to by eurozone leaders at the summit on March 11.
The Financial Times again reported:
"After months of negotiations, the Finnish government, normally one of the most pro-European Union members in the bloc is set to hold up one of the central elements of the package, in part because it has been blindsided at home by the rise of a populist anti-euro party that is threatening to cause havoc in next month’s national elections."
Cooler heads are likely to try and resolve the concerns in Portugal because no one really wants to see Portugal join Ireland and Greece in the bailout corner, but the media reports say the chances of it happening are increasingly real.
Portuguese government instrumentalities were reported earlier in the week requesting emergency funding from the central government because they had not been able to raise funds in the markets.
There’s also the lingering problem about Ireland and its desire to get a 1% cut in the interest rate it will be charged on its bailout money.
The Germans and French monstered the new government at the March 11 poll and demanded Ireland raise its company tax in return for the cut in the interest rate.
Ireland has a 12.5% company tax rate and says that won’t change as it’s vital to the country’s rebuilding plan and repaying the bailout debt.
In Portugal the argument between the government and opposition follows the unveiling earlier this month of Portugal’s fourth austerity package in a year and its endorsement by the European Commission and the European Central Bank.
That is likely to be defeated by the opposition, forcing an election.
