March 24, 2011

Portugal Government Collapses as Austerity Measures Rejected; EU Meets

Lisbon is not expected to ask for bailout; EU disagreement could stall action on bailout fund

As expected, the Portuguese parliament voted down fresh austerity measures on Wednesday, and Jose Socrates resigned as prime minister. However, he said that he would still attend the European Union (EU) summit meeting convening Thursday in a caretaker role. Whether that would lead to any action is doubtful, however, as disagreement among euro zone members makes it unlikely that any action will be taken on what was expected to be one focus of the meeting: strengthening the European Financial Stability Facility (EFSF).

Reuters reported that in the wake of the vote, Socrates maintained his staunch opposition to requesting a bailout from the EU and the International Monetary Fund (IMF). He may not be alone in that opinion, either, since most of the Portuguese parliament is opposed to asking for aid, and any bailout package offered would have to be approved by its vote. Socrates will likely remain at the head of a caretaker government until a new one is formed in the wake of his resignation.

Smooth sailing is not expected at the EU gathering, either, with discord over the EFSF likely to delay action on strengthening the rescue mechanism. Originally the meeting was supposed to see an agreement on a “comprehensive package” of steps to be taken to relieve the debt crisis. Disagreements, however, have led to lowered expectations and now no agreement is expected before the middle of the year—perhaps prior to the next EU meeting in late June.

At issue is a technicality: whether member nations will strengthen the lending capacity of the EFSF to its full 440 billion euros ($622.045 billion) by means of capital or guarantees. Finland stands in the way, since it dissolved its own parliament and cannot sign on to any agreement till after April 17 elections are held and a new government is formed, most likely not till May. Helsinki opposes the use of guarantees, and the new government may hold further complications if it includes the New Finns party, which opposes other EU crisis measures.

Not only is the EFSF is under debate. While the group has agreed to create a permanent European Stability Mechanism (ESM), a follow-on crisis fund that will replace the EFSF, members have not agreed on how to fund the ESM.

Another question before the meeting is the interest rate on the Irish bailout, and it is not expected that that should be resolved on this occasion either. An EU diplomat was quoted in the report saying on Wednesday, “"There is almost certainly not going to be a resolution of the Irish issues tomorrow or Friday.” He continued, “"The feeling is that the outstanding issues for Ireland, which are not just the interest rate but the banking question, that they are better dealt with as a package."

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