Portugal heads for election despite bailout threat

AP News
Posted: Mar 25, 2011 3:29 PM
Portugal heads for election despite bailout threat

Portugal's political parties opted Friday to hold an early election rather than form a new government, even though that could hasten the debt-stressed nation's financial woes and force it to take a bailout.

Portugal is rudderless and at the mercy of nervous financial markets after the Socialist government quit earlier this week in a dispute with rivals over new austerity measures.

President Anibal Cavaco Silva, who is largely a figurehead but oversees election procedures, met Friday with all the country's political parties to see if they would voluntarily form a coalition government. But all backed a new election instead, which would take place in late May or early June.

Portugal, one of western Europe's poorest countries, is being engulfed by a financial crisis that is pushing it toward a bailout it doesn't want.

A decade of anemic growth during which Portugal ran up high debts has spooked the markets, sending its borrowing costs to unsustainably high levels. Although Europe's bailout fund is able to come up with the euro75 billion that analysts estimate Portugal may need, its problems have contributed to investor fears about the entire 17-nation eurozone's financial soundness.

The parties' decisions Friday means that bailout request to the European Union and the International Monetary Fund will be deferred until early summer, after the election.

That might set up a cash-flow problem. The outgoing government says Portugal has enough cash to meet a euro4.5 billion ($6.4 billion) bond repayment next month, but there is uncertainty about whether it will have enough for a euro4.9 billion ($6.9 billion) debt due in June.

Barclays Capital said Portugal's funding was tight but the June repayment doesn't spell disaster. "In our opinion, Portugal is likely to find financing, but it is not in a comfortable position," it said.

Neither of Portugal's two dominant parties want to ask for outside financial help like Greece and Ireland, the two other eurozone countries that were forced to accept bailouts last year, due to fears that they would be locked into tight fiscal policies and lower living standards for years.

"Portugal doesn't need any help," outgoing Socialist Prime Minister Jose Socrates said Friday, insisting that his own policy of tax hikes and pay cuts would reduce the country's high debt burden and restore investor faith.

"I know what (a bailout) would mean. I know what it meant for the Greeks and the Irish and I don't want that for my country," he said at a European summit in Brussels.

Socrates says his latest austerity plan _ which opposition parties rejected _ would drive the deficit down to 4.6 percent this year. The opposition Social Democratic Party agrees on the need for deficit-cutting measures but said the government's latest package went too far.

Even without assistance, austerity measures are likely to remain in place for years, choking one of the eurozone's smallest and feeblest economies and deepening public anger. A 24-hour train strike Friday shut down the national rail network _ the latest action by disgruntled public employees.

The government's downfall after a year of austerity measures aimed at averting a bailout sent Portugal into a financial tailspin. The fiscal problems coincide with a forecast double-dip recession this year and a record jobless rate of 11.2 percent.

An opinion poll published Friday by Diario Economico newspaper indicated the main opposition party, the Social Democrats, would collect 46.7 percent of the vote in an election compared with just 24.5 percent for the Socialists.

The poll, by Marktest, was based on 805 telephone interviews between March 18-23. Its margin of error was 3.45 percent.