Portugal crisis to dominate EU summit

2011-03-24 12:37

Lisbon - The resignation of Portugal's prime minister will dominate a summit of EU leaders on the European economy on Thursday and Friday, with pressure intense on Lisbon to seek a bailout package.

Prime Minister Jose Socrates resigned on Wednesday after parliament rejected his government's latest austerity measures aimed at avoiding EU financial assistance. But he said he would still attend the two-day summit in a caretaker capacity.

Socrates remains adamantly opposed to requesting EU/International Monetary Fund (IMF) aid and has made it clear he intends to hold that line, at least until a new Portuguese government is formed in the weeks ahead.

That leaves Portugal in limbo, but the likelihood remains that a bailout will have to be taken in the end.

Asked if Socrates would ask for aid at the summit, a senior EU official said: "I would be surprised. There is a doubt on whether he has any mandate right now to do so... But I would not rule out."

Lisbon needs to refinance €4.5bn of sovereign debt in April, which may prove a trigger for finally making the request for aid.

One problem complicating Portugal's situation is that any bailout request would have to be approved by parliament, and the majority is opposed to asking for help.

"I have always warned of the profoundly negative consequences of seeking foreign aid," Socrates said as he resigned, vowing to continue to do everything to avoid it.

If aid were to be requested - and EU officials have made clear they stand ready to provide it - it is estimated that Lisbon would need €60bn to €80bn.

Portuguese benchmark 10-year bond yields rose further on Thursday, climbing to 7.90%, far above the 7.0% regarded as long-term sustainable.

The euro weakened to $1.4070 from $1.4117.

China, which has offered to buy Portuguese government debt in the past, said it saw continued risks from the eurozone debt crisis but added that it had increased its holdings of European government bonds to help the region.