March 23, 2011 / 1:22 AM / in 8 years

Portugal government may collapse before EU summit

LISBON (Reuters) - Portugal’s parliament is expected to reject the government’s latest austerity measures on Wednesday, setting the stage for the possible collapse of the minority Socialist administration a day before a European summit.

Portuguese Prime Minister Jose Socrates speaks during the bi-monthly debate in parliament in Lisbon March 18, 2011. REUTERS/Jose Manuel Ribeiro

Prime Minister Jose Socrates has said he will resign if the plan is defeated. He has said its rejection would force the debt-laden country to follow Greece and Ireland and seek an international bailout, which he opposes.

All opposition parties have proposed resolutions calling for the rejection of the measures, which reduce pensions and state spending.

The main opposition Social Democrats, who have previously backed austerity, have begun talking about a snap election.

“If all these positions that now seem irreversible are confirmed, then yes (the government will step down),” Francisco Assis, Socialist bench leader in parliament, told reporters after a late-night party meeting.

“The prime minister does not want to resign, but he cannot govern against his convictions,” Assis said, blaming the Social Democrats for “opening a political crisis at the worst moment” despite the government’s willingness to negotiate a solution.

The Socialists have 97 of parliament’s 230 seats and have now no allies on whom they can rely. The plan needs at least 116 votes to pass.

A last-minute intervention by President Anibal Cavaco Silva in the crisis appears less likely after he said late on Tuesday his “room for manoeuvre to act preventively” was limited.

The government had hoped to obtain support for its plan before Thursday’s EU summit, which is expected to approve a beefed-up euro zone rescue fund.

BOND YIELD UP

Portuguese benchmark 10-year bond yield rose to 7.68 percent on Tuesday from Monday’s 7.53 percent and the spread over safer German Bunds rose 13 basis points to 443 bps. Many economists see borrowing costs above 7 percent as unsustainable and say Portugal will have to resort to the rescue mechanism.

“The idea and concept that the austerity may be thrown out and the government may fall is undoubtedly not what bond holders want to hear,” said Peter Chatwell, debt strategist at Credit Agricole in London.

He said bonds would probably be further affected by the “spooky effect on the horizon,” but added that the effects would be limited if the market believed “the next government will be strong enough to keep the debt under control.”

The Social Democrats, ahead in opinion polls, are broadly committed to reducing the budget deficit.

The constitution stipulates that the country can hold a snap election at the earliest 55 days after one is called by the president. Meanwhile, the outgoing government remains in office as a caretaker administration with limited powers.

“My worry is the period of inaction before a new government takes over,” said Silvio Peruzzo, an economist at RBS in London, adding that he did not expect decision-making to come to a standstill, preventing the country from seeking a bailout if it needed one urgently.

Costa Pinto added: “Although a caretaker government cannot take major autonomous initiatives, it could take a decision on resorting to aid if it is backed by parliament.”

Political analysts expect the Social Democrats to revive their coalition with the smaller right-wing CDS-PP party, after a possible election, to guarantee a full majority in parliament.

The Social Democrats have said they do not rule out seeking a bailout if they are elected, if such aid were unavoidable to enable Portugal to recover from its economic difficulties.

Editing by Andrew Dobbie and Jodie Ginsberg

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