Portuguese Prime Minister Quits

Jose Socrates, Portugal's Prime Minister, has resigned from office after his minority government's proposal for tax increases and spending cuts was opposed. "Today every opposition party rejected the measures proposed by the government to prevent that Portugal resort to external aid," Socrates said in a televised address on Wednesday. "The opposition removed from the government the conditions to govern. As a result I have presented my resignation to the president," he said after meeting with Portugal's President Anibal Cavaco Silva for about 20 minutes. The lack of compromise from the leading Portuguese parties will lead to nerve wrenching implications if action does not take affect in the near future especially. The government has already warned that a failure to reach agreement on more austerity measures would lead the country closer to a bailout. "This crisis will have very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets," Socrates said. "So from now on it is those who provoked it who will be responsible for its consequences." Portugal is dealing with additional problems today. The Portuguese borrowing costs have risen to a new record high. Portugal must borrow about €10 billion, or $14 billion, in April and June to refinance its existing debt. “The most likely outcome will be early general elections, which could be held, if there are no delays, as early as June,” said Giuseppe Maraffino, an analyst at Barclays Capital in London. “However, given adverse market funding conditions, an E.U.-I.M.F. programme looks increasingly likely.” Mr. Maraffino also added that Portugal will also need to raise funds to cover domestic liabilities like social security. In the meantime, the government of Mr. Sócrates will remain in place for the duration of the European summit that is taking place in Brussels Thursday and Friday. The future of Portugal is a headache for the European Union's leaders who are in a tight bind. “In the near term, we suspect bond yields will keep pushing higher if only because uncertainty will prevail, and a number of investors will likely be forced or willing to reduce their positions further,” Mr. Maraffino of Barclays said. A near-term default remains unlikely but future political leadership in Portugal and investor confidence will be a driving factor to consider as further details about EU action and potential contagion become known throughout the market place.