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The likelihood of a third European Union-International Monetary Fund bailout has sharply increased after Portuguese Premier, Mr Jose Socrates, stepped down after his fourth round of austerity measures in a year were firmly rejected by Parliament.
“For several months I have fought for a cause I consider absolutely fundamental to protect the nation and to avoid the need for resorting to external aid,” said Mr Socrates as he stepped down late on Wednesday.
“I always warned of the extreme negative consequences of resorting to external assistance.”
€85-b aid
However, external assistance in the form of an EU-IMF bailout of the kind already received by Ireland and Greece is practically “inevitable” according to Ms Emilie Gay, an economist focused on Portugal at London-based Capital Economics. She estimates the total assistance required is in the region of around €85 billion.
“The government's fiscal consolidation programme is in tatters,” says BNP Paribas' chief euro zone economist, Mr Ken Wattret, who also believes it's a question of when rather than whether the bailout will take place.
While debt levels are nowhere close to Irish and Greek levels, a number of factors, including low growth over the past decade, have sent the country's budget deficit soaring, touching a high of 9.3 per cent of GDP in 2009, and hitting 7 per cent last year.
Mr Socrates' party had pledged to cut the figure to 4.6 per cent this year. However, this latest round of austerity measures, which included tax hikes, cuts to pension provision, health care and infrastructure spend, triggered massive national opposition and protest. The Government had hoped the threat of resignation — and consequent instability — would force a show of unity, and backing for the measures.
Borrowing costs
Portugal's borrowing costs continued to surge on Thursday, as European leaders meet for a two-day conference in Brussels on Thursday and Friday to discuss the European Financial Stability Facility and enlarging the bailout fund. Portugal faces €4.2 billion of debt payments in April, and an additional €4.9 billion in June.
Lack of clear leadership
However, one factor that may complicate the process by which the country requests aid is the lack of any clear political leadership, argues Mr Wattret.
“Who is in a position to request the assistance? There has to be a mandate.”
European leaders will also be eager to avoid situations such as in Ireland where the new Taoiseach, Mr Enda Kenny, is attempting to renegotiate bailout terms.
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