LISBON (MNI) – Portugal’s prime minister, Jose Socrates, announced
late Wednesday his resignation following the rejection of his
government’s package of new austerity measures by opposition parties in
parliament.

The move will likely usher in a period of political instability at
a time when Lisbon is under increasing pressure from financial markets
to adopt the type of fiscal consolidation steps the government had
proposed.

“I was totally available for dialogue and negotiations with all
parties up until the last minute,” Socrates said in a televised speech
to the nation after consulting with President Anibal Cavaco Silva.
“Those who caused this crisis are the ones who from now on will be
responsible for the consequences,”

Portugal’s securities have came under intense pressure in recent
days. Yields on its benchmark 10-year bond hit a new record high
Wednesday above 8% — well beyond the 7% limit that the government
itself said was unsustainable.

Facing soaring borrowing costs, Portugal is now even more likely to
turn to the European Union and the International Monetary Fund for
financial support — an option Socrates had long sought to avoid.

However, as such aid is conditional, the new government will no
doubt be obliged to adopt measures similar to those rejected by
Parliament, European Central Bank Executive Board member Lorenzo Bini
Smaghi predicted in a newspaper interview published today.

“I have always warned about the consequences of asking for outside
help,” Socrates reminded. “Whoever thinks that they won a victory in the
political game today is not looking at what is essential. Today the
country has lost. It has not won.”

“Obstruction was taken to an intolerable limit,” he declared.
“Irresponsibility has triumphed over a sense of State.”

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

The government hoped to cut the deficit to 4.6% of GDP from the
official estimate of 6.9% last year. However, it emerged Wednesday that
the official 2010 deficit data are being questioned by EU authorities.
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%.

The head of the main opposition party PSD, Pedro Passos Coelho,
charged afterwards that the government had been unable to create the
conditions for confidence.

“The vote that happened today will allow Portugal to present the
markets and European partners medium- and long-term strategies to attack
the problems,” Coelho said, pledging to “distribute sacrifices more
fairly.”

Socrates will now have to go empty-handed to the summit of EU
leaders Thursday in Brussels, a meeting markets had hoped 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 and the risk of fallout
for countries like Spain, Italy or Belgium.

Observers do not expected new elections to be held in Portugal
before May or June. Socrates said he would run again.

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