–Expected Move Likely To Result In Prime Minister’s Resignation
–PM Socrates To Meet With President, Address Nation Later Tonight
–Political Instability, Market Pressure Seen Raising Odds Of Bailout

LISBON (MNI) – Opposition parties in Portugal’s Parliament joined
forces Wednesday evening to defeat a new package of austerity measures
proposed by the minority Socialist government.

The rebuff is expected to force the resignation of Prime Minister
Jose Socrates and usher in a period of political instability at a time
when Lisbon is under increasing pressure in financial markets.

Socrates, who did not attend the debate, is scheduled to meet at
with President Anibal Cavaco Silva. It is widely anticipated that he
will submit his resignation. Socrates will address the nation after the
meeting.

The government’s proposals rejected this evening sought to reduce
the public deficit by an additional 0.8% of GDP this year. The measures
included cuts in health spending and welfare benefits and a 10%
reduction in state pensions above E1,500 per month,

The government’s plan aimed to lower the deficit to 4.6% of GDP
this year from the official estimate of 6.9% last year. However, it
emerged Wednesday that the government’s 2010 deficit data are being
questioned by Eurostat, the European Union’s statistical agency. Once
new data are factored in — including the costs of national transport
companies and the nationalized Banco Portugues de Negocios — the 2010
deficit was likely above 8%.

Such a revision would suggest that even larger deficit cuts —
above and beyond what the Parliament rejected today — would be needed
to meet the new deficit goals for this year.

If Socrates does resign, he would go empty-handed and potentially
in a caretaker capacity to the summit of EU leaders which starts in
Brussels on Thursday. Markets had hoped the summit would provide
reassurance that governments were working effectively to end the
Eurozone debt crisis.

Instead, the collapse of the Portuguese government will only
heighten the tension in sovereign debt markets, where Portugal’s
securities have came under intense pressure in the last two sessions.
Yields on its benchmark 10-year bond hit a new record high today above
8% — well beyond the 7% limit that the government itself said was
unsustainable.

The combination of political instability and sky-high market
financing rates could well force Lisbon to seek aid from the European
Financial Stability Facility and the International Monetary Fund,
despite the current government’s long-standing insistence that it would
not do so.

The likely aggravation of the debt crisis could heighten the risk
of fallout for countries like Spain, Italy or Belgium as well.

[TOPICS: M$X$$$,M$$EC$,MGX$$$,M$$CR$,M$S$$$]