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Portugal edges toward bailout after govt quits

By BARRY HATTON
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.

A senior official in the outgoing government, Pedro Silva Pereira, said the Socialist Party which has been in power for the last six years will continue to resist a rescue. Officials have for more than a year argued a bailout would frighten away investors and delay economic recovery for years, further squeezing living standards.

The leader of Portugal's main opposition Social Democratic Party, which has been ahead in recent opinion polls, said the outgoing prime minister had no mandate to negotiate a bailout. Pedro Passos Coelho, who had backed debt reduction plans before rejecting the latest austerity package, said he didn't know whether Portugal needed help because he didn't have complete information about national accounts.

The two main parties are under strong pressure to compromise in a bi-partisan agreement, which Portugal's head of state may try to broker in talks scheduled for Friday.

The Portuguese prime minister's resignation late Wednesday was the latest political blowback from a crisis that has forced painful retrenchment across Europe, darkening prospects for growth and jobs. Portugal's jobless rate stands at a record 11.2 percent.

Debt problems likewise brought down Ireland's government earlier this year after it took a bailout and enacted severe cutbacks, forcing an election that was won by the main opposition party.

In the streets of Lisbon there was a mood of resignation and dismay on a day that subway workers walked off the job in the latest of a wave of strikes protesting a string of tax hikes and pay cuts.

Filipa Ferreira, a 45-year-old engineer, said the crisis had discredited the country's leaders. "Our politicians can't cope with the scale of this crisis," she said.

Fernando Gomes, a part-time gardener, shrugged his shoulders at the problems hitting a country that is already one of western Europe's poorest. "It just means more years of hardship for us," the 63-year-old said, shaking his head.

Juergen Michels, an economist at Citigroup in London, said a bailout for Portugal is firmly on the cards.

The government's resignation "shows that the problems are really huge and unless the market is supportive, (Portugal) will need help - and the markets aren't supportive at the moment," he said.

Portugal's difficulties aren't confined to its deep debt, racked up during a decade of meager growth. The country's abiding problem is a reluctance to surrender entitlements and adopt reforms that would improve productivity and make it more competitive.

The EU has long pushed Portugal to change its restrictive labor laws which protect jobs but stifle competition and to reduce bureaucracy and trim overstaffed public services.

What is certain is the Portuguese face a long road out of their economic doldrums. The Bank of Portugal predicts a double-dip recession this year, just as the government desperately needs income to cut debt, as austerity measures bite into growth for years to come.

© 2011 The Associated Press