Portugal edges toward bailout after govt quits

The Associated Press
Thursday, March 24, 2011; 3:33 PM

LISBON, Portugal -- Portugal's economic future looked increasingly bleak Thursday as political paralysis, a grinding debt burden and a double-dip recession pushed it one step away from becoming the third eurozone country to take a bailout.

The country's woes quickly piled up a day after the cash-strapped government resigned following Parliament's rejection of its debt-reduction policies. Portugal's borrowing costs surged to unsustainable levels while an international ratings agency downgraded its credit worthiness.

And as the country veered off course, there was no indication who might take the wheel, or when.

It wasn't clear whether the interim government has the authority to negotiate a bailout, nor whether a broad coalition government may be possible or how soon new elections could be held. It would likely take at least two months for a ballot to be organized in accordance with constitutional requirements.

Those uncertainties added to tensions and brought an appeal from European Commission president Jose Manuel Barroso, a former Portuguese prime minister.

"The important thing is that, as quickly as possible ... there is a national consensus on the need to meet the goals Portugal has set for reducing its deficit and debt levels," Barroso told reporters at an European Union summit in Brussels.

A bailout for Portugal, while affordable for the EU's rescue fund, would still be massive for the size of the country.

Jean-Claude Juncker, the prime minister of Luxembourg who chairs the eurozone finance ministers meetings, told France 24 television that if Portugal asked for a bailout it would need about euro75 billion ($106 billion) - roughly half its annual gross domestic product. That is less than the euro110 billion ($155 billion) Greece got but more than Ireland's euro67.5 billion ($95 billion).

Whatever the final sum, the financial fallout of the government's resignation is likely to be painful for Portugal, already one of the eurozone's smallest and feeblest economies.

Markets expressed their qualms by sending the interest rate on the government's 10-year bonds to a euro-era record of 7.71 percent - an unsustainable financial burden just as the Portuguese are trying to save money.

The rates are likely to worsen after Fitch rating agency sliced two notches off the government's credit worthiness, to A- from A+, saying "policy uncertainty has weakened the credibility of Portugal's fiscal and structural reform program."

The country's political leaders appeared to be in no rush to solicit help, though.

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