Portugal govt set to quit after losing debt vote

Debt-stressed Portugal's Parliament has refused to endorse more austerity measures aimed at avoiding a bailout — a move that is likely to trigger the minority government's resignation.

All opposition parties rejected the government's latest proposal for spending cuts and tax hikes in a vote Wednesday.

Prime Minister Jose Socrates previously said he would no longer be able to run the country if the plan was defeated.

The setback could thwart efforts by European leaders to persuade nervous investors that all is well in the eurozone and doom Portugal to accepting financial assistance like Greece and Ireland last year.

Many analysts expected the government's parliamentary defeat to lead to elections in May or June.


THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

LISBON, Portugal (AP) — Portugal's minority government neared collapse Wednesday as lawmakers were poised to vote against its proposal for more austerity measures, casting further uncertainty over the debt-stressed country that has been scrambling to avoid a bailout for the past year.

As the Parliament began debating the latest crisis policies, all opposition parties had already vowed to reject the measures, making the Socialist government's failure imminent — Prime Minister Jose Socrates had said he wouldn't be able to run the country if his plan was defeated.

The political upheaval could thwart efforts by European leaders to persuade nervous investors that all is well in the 17-nation eurozone, including Portugal, and launch another spell of market turbulence for the bloc.

The government's downfall would also set Portugal adrift just as it is trying to restore its fiscal health and probably doom it to accepting a bailout like Greece and Ireland last year. By most measures, Portugal is one of the eurozone's smallest and frailest economies, growing at a meager rate of less than 1 percent a year over the past decade when it amassed heavy debts.

Finance Minister Fernando Teixeira dos Santos said the political crisis could bring a bailout closer and lead to even greater sacrifices for the Portuguese.

"Rejecting (this plan) will worsen financial market conditions, bringing additional difficulties for the country's financing which I doubt we will be able to bear on our own," he told Parliament.

Socrates, the prime minister, walked out of Parliament after his finance minister's opening 10-minute speech and did not comment to reporters.

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.

The center-left Socialist government's latest austerity package is the fourth set of measures in 11 months as Portugal has tried to avoid the embarrassment of asking for help. It has introduced tax hikes and pay cuts that have angered trade unions and prompted a wave of street demonstrations and strikes. Train engineers walked off the job during the morning commute Wednesday, causing widespread travel disruption.

Opposition parties say the government's latest plan goes too far because it hurts the weaker sections of society, especially pensioners who will 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."

An election consigns Portugal to at least two months of unwelcome political paralysis. Analysts predicted a ballot to elect a new government in May or June.

The political tension fueled a rise in Portugal's borrowing rates, just as it is trying to cut spending. The yield on the country's 10-year bond, for example, was up to 7.58 percent Tuesday — just shy of 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.

According to constitutional procedure, the prime minister has to present his resignation to the head of state. Socrates and President Anibal Cavaco Silva were due to hold their regular weekly meeting on Wednesday evening.

If the prime minister resigns Cavaco Silva 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.

If the prime minister quits 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.