LONDON — European leaders agreed early Friday to create a permanent fund to rescue financially troubled nations even as the debt crisis in Portugal sharply worsened, with the Iberian nation appearing almost sure to follow Greece and Ireland in seeking an international bailout.
The escalating problems in Portugal — which tipped into a red zone on Wednesday after its prime minister resigned when parliament rejected deficit-busting austerity measures — underscored the still unsettling financial problems gripping the 17-nation union that shares the euro.
Meeting in Brussels, European leaders agreed to replace an emergency — and temporary — rescue fund set up last May with a larger, permanent one armed with $700 billion. At the insistence of Germany, contributions into the fund will happen more gradually than anticipated, with less cash required by each nation at inception in 2013. Leaders also delayed until June a decision on whether to increase the size of the temporary $620 billion bailout fund.
Instead of a hoped-for moment of victory over a debt crisis that has raised questions about the sustainability of the euro, the announcement came as the region was forced to deal with the mounting crisis in Portugal.
Though European diplomats have suggested they would be willing to back a quick, $100 billion rescue for Portugal, they are unlikely to do so unless Lisbon agrees to the kind of tough austerity measures to trim chronic overspending that its parliament rejected.
In addition, any deal to rescue Portugal would almost surely include the International Monetary Fund, which is likely to insist on other reform demands. In Greece, for instance, the European Union and IMF rescue package has prodded the government in Athens to move forward with a major privatization plan, an insistence that Portugal might also need to contend with.
“Portugal is a country living above its means, and it is going to have to change a number of its ways,” said Andre Sapir, senior fellow at Bruegel, the Brussels-based think tank. “What it needs to do ultimately and what any E.U.-IMF program is going to be about is not just austerity, but a whole series of measures to change its economic course.”
Economically stagnant, uncompetitive and nearly broke, Portugal might soon have no choice. It must raise $12 billion over the next few weeks to meet its obligations to investors.
But as the risk of a default has sharply jumped, the rates lenders are now charging Portugal to borrow funds on the market soared to new, prohibitively expensive highs on Friday. It came as Standard & Poor’s followed Fitch in cutting its rating on Portuguese debt, slashing its grade on the troubled nation’s bonds to just two notches above junk status.
The rating agency said the political instability in Portugal following the resignation of Prime Minister Jose Socrates had jolted market confidence further. Socrates, though still a caretaker, will be unable to push forward with an austerity budget that would have cut state pension, health-care and infrastructure spending, leaving political parties scrambling to forge a new coalition or call new elections.
S&P warned it could cut the rating again as early as next week.