Portugal woes steal show at EU summit

[March 25, 2011]  BRUSSELS (AP) -- On the day that EU leaders presented what they hoped was the final version of their plan to solve the region's debt troubles, their summit in Brussels was overwhelmed by debate over Portugal's political crisis.

The meeting, which concluded early Friday, was supposed to mark the moment when governments finally get a grip on the debt crisis that has been crippling Europe for more than a year -- signing off on closer economic cooperation and an overhaul of the size and powers of the region's bailout funds.

Instead, all the focus turned to whether Portugal will take a bailout and how Ireland will cope with its banks' losses -- due to be revealed next week.

Although leaders stressed that they had all the tools to help Portugal should it require help, the government's defeat over planned austerity measures revealed some cracks in their crisis strategy, which revolves around states slashing deficits in return for expensive rescue loans.

Pedro Passos Coelho, the leader of Portugal's main opposition party and the most likely candidate to become its next prime minister, said it was "impossible" to tell whether the country could avoid an international bailout like the ones taken by Greece and Ireland.

Passos Coelho's center-right Social Democratic Party and other opposition parties Wednesday night refused to endorse Prime Minister Jose Socrates' spending cuts and tax increases, triggering his resignation.

The opposition leader met other conservative EU politicians at a pre-summit get-together earlier in the day, while Socrates represented his country at the actual summit. However, Passos Coelho said Socrates would not have a mandate to negotiate a bailout on behalf of his country.

Most analysts believe an international rescue is only a matter of time, as Lisbon faces huge debt repayments over the next few months that it will have a hard time meeting at current interest rates.

European Commission President Jose Manuel Barroso said Socrates had assured his EU counterparts that Portugal would come up with the funding it needed over the next few months and that all major parties were committed to cut the country's budget deficit -- despite disagreement over the exact measures.

German Chancellor Angela Merkel earlier in the day stressed that reaching the budgetary targets over the next three years was "not only important for Portugal but also for the entire eurozone."

In an effort to finally get ahead of the crisis, eurozone policymakers over the past weeks reached deals on the size and powers of their provisional and future bailout funds, and committed to improve the competitiveness of their economies by targeting wage increases and unsustainable public pension systems.

On Thursday, six non-euro states -- Poland, Bulgaria, Denmark, Romania, Lithuania, and Latvia -- announced that they will also sign up to the competitiveness deal, which has been dubbed the "pact for the euro." Most of these countries are expected to adopt the euro eventually, so the pact gives them a chance to get their economies in the right shape.

But a growing unwillingness among taxpayers -- and politicians -- in some countries to bet solely on austerity measures to overcome the region's financial crisis was starting to put some of these plans into doubt.

"The negative developments in Portugal are likely to crowd out the positive message of European leaders agreeing to the so-called comprehensive solution (to the crisis)," Sony Kapoor, managing director of economic think tank Re-Define, said in a note.

On the insistence of Germany, one part of the solution, namely when eurozone states would have to make their capital payments into a post-2013 crisis fund, was tweaked Thursday, unraveling a deal that finance ministers had struck only on Monday.

Two other points -- the technical details of how the current bailout fund will be able to lend the promised euro440 billion and whether Ireland will get better terms for its bailout deal -- were put off till later.

Ireland's Prime Minister Enda Kenny said he wanted to wait for the results of bank stress tests out next week before attempting to renegotiate the country's rescue program.

His government has threatened to make senior bondholders take losses if the stress test uncover bigger-than-expected capital holes in the country's banks, which have already received some euro50 billion from the Irish state.

"From the Irish point of view I prefer to deal with substance rather than theory," he told reporters.

The stress tests will give a clearer picture of the state of the banks and the ability of the Irish government to continue shouldering their losses. But they will also show other eurozone governments, whose banks were prolific lenders to their Irish counterparts, how much they are drawn into the problem.

If the Irish force losses on bank bondholders that could cause huge trouble for banks in Germany, the U.K. and France.

The EU and the European Central Bank have so far ruled out letting big banks fail outright, fearing that it would cause panic on financial markets similar to what happened after the collapse of Lehman Brothers in 2008.

The unwillingness of citizens to continue paying for what many see as the excesses of financial institutions and politicians was visible in Brussels, where close to 20,000 workers protested against the economic measures envisaged by leaders in their drive for more competitiveness.

Police used water cannons and pepper spray to keep demonstrators away from the site of Thursday's summit and a dozen of police officers were injured in scuffles. The trade unions called the measures an unprecedented attack on Europe's welfare state, targeting workers with austerity measures while undermining cherished social benefits.

[Associated Press; By GABRIELE STEINHAUSER]

Raf Casert and David McHugh in Brussels, Shawn Pogatchnik in Dublin and Barry Hatton in Lisbon contributed to this story.

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