By BARRY HATTON
The Associated Press
Wednesday, March 23, 2011; 6:25 PM
LISBON, Portugal -- Debt-stressed Portugal's prime minister quit Wednesday after opposition parties rejected his latest austerity measures devised to avoid a bailout that looks increasingly likely.
All opposition parties united to defeat Prime Minister Jose Socrates' proposals in a parliamentary vote, saying the belt-tightening went too far.
"The opposition (parties) took away the government's ability to continue running the country. As a consequence, I have tendered my resignation to the president," Socrates said in a televised statement.
In accordance with constitutional procedure the prime minister presented his resignation to the head of state, who is mostly a ceremonial figurehead and has no executive powers, before announcing it publicly. His resignation also ended the center-left Socialist government's six-year period in power.
The government's latest austerity package was its fourth set of measures in 11 months as Portugal has scrambled to avoid the embarrassment and financial consequences of asking for outside help. It has introduced tax hikes and pay cuts that have angered trade unions and prompted a wave of street demonstrations and strikes.
Portugal's problems could thwart efforts by European leaders to persuade nervous investors that all is well in the eurozone, including Portugal. It could launch another spell of market turbulence for the bloc and doom Lisbon to accepting financial assistance like Greece and Ireland last year.
European leaders hope to soothe nervous international investors at a two-day summit starting Thursday. Socrates is scheduled to attend the meeting.
"This crisis comes ... at the worst possible time - ahead of a summit that's decisive for Portugal and decisive for Europe too," Socrates said.
He said the political crisis would entail "deeply negative consequences" for Portugal, one of the 17-nation eurozone's smallest and frailest economies.
The opposition's rejection of his plan increased the probability of Portugal asking for outside help which would entail "much tougher measures" than those he proposed and which had won the backing of European leaders, Socrates said.
Foreign financial assistance comes with strings attached, including a role for the International Monetary Fund which strips away government control of key fiscal policies for years, making it a last resort for cash-strapped countries.
Socrates said his government had done all it could to avert a bailout "so we wouldn't end up in a situation like Greece or Ireland" where fiscal measures imposed by the bailout terms have squeezed the finances of families and companies.
A bailout would be "deeply negative for the image, prestige and reputation of the country," Socrates said.
Debt woes, and differences over how to tackle them, also brought down Ireland's government earlier this year after it accepted a bailout, forcing an election that was won by the main opposition party.
The government's downfall set Portugal, a country of 10.6 million people, adrift just as it is trying to restore its fiscal health.
President Anibal Cavaco Silva said in a statement he will meet with all political parties on Friday to decide the way forward.
A new election consigns Portugal to at least two months of unwelcome political paralysis.
Many analysts expected the government's resignation to lead to elections in May or June. The outgoing administration will remain in power as a caretaker government.
Socrates resignation, and by procedure that of the government, was expected after days of political tension but will likely re-ignite market anxiety about the financial soundness of the wider eurozone.
Opposition parties said the government's latest plan went too far because it would hurt the weaker sections of society, especially pensioners who would pay more tax. The package also introduces further hikes in personal income and corporate tax, broadens previous welfare cuts and raises public transport fares.
Social Democratic lawmaker Luis Montenegro said his party had "the patriotic duty ... to stop the Socialist government going down the wrong, dead-end path."
The Socialist have only 97 lawmakers in the 230-member legislature and needed the consent of their rivals to enact policy.
The recent political tension has fueled a rise in Portugal's borrowing rates, just as it is attempting to cut spending. The yield on the country's 10-year bond, for example, was up to 7.63 percent Tuesday - its euro-era record level.
The interest rate has been above an unsustainable 7 percent for weeks despite the government's earlier austerity measures which, its political rivals say, failed to dispel investor fears about lending to Portugal.
Darkening the outlook is a feeble national economy. The government predicts a double-dip recession this year, and unemployment stands at a record 11.2 percent. Moody's recently downgraded the country's credit rating, and Standard & Poor's has warned it may follow suit.
The government says Portugal has enough cash in reserve to meet a euro4.5 billion ($6.4 billion) bond repayment next month, the first of two major redemptions this year, but the political problems won't make its fundraising any easier.
Barclays Capital reckons that on current trends the public debt will keep growing and match annual gross domestic product by 2014, unless big changes are introduced.
"Without a strong structural reform agenda, in our view, it is very unlikely that Portugal can grow out of its indebtedness," Barclays Capital said Wednesday.
But the absence of an elected government will stall efforts to generate fresh growth even though the main opposition center-right Social Democratic Party, which recent opinion polls predict would win an election, backs continued measures to reduce debt and improve competitiveness.
Portugal's head of state could invite all six parties represented in Parliament to form a coalition government, which would avoid the need for immediate elections, but given the depth of animosity between the party leaders it is an unlikely outcome.
That would leave the Socialist Party in power until a ballot as a caretaker government which, under the Constitution, is confined to "acts strictly necessary to ensure the management of public business." The scope of those powers has been widely debated by experts, but it is unlikely to grant the authority to request a bailout unless mandated by Parliament.
The president must spend days following constitutional procedures - convening a series of meetings with all political parties and with the Council of State, an advisory panel - before fixing an election date at least 55 days away.
The winner of the ballot then needs several days to pick members of government and announce a date for a swearing-in ceremony.