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Portugal can't reach austerity-budget deal, may need EU bailout

March 23, 2011 |  4:14 pm

Europe may soon be funding another bailout, after Portugal’s government on Wednesday failed to get parliament’s support for an austerity plan to slash the country’s budget deficit.

Prime Minister Jose Socrates resigned, as he said he would if the budget was rejected.

The breakdown in Portugal weighed on the euro, which had reached a one-year high against the dollar on Monday. The euro slid to $1.409 from $1.420 on Tuesday and $1.423 on Monday.

Socrates The Portuguese government’s collapse could further drive up the country’s cost of borrowing, already at high levels. That may mean that Portugal will have no choice but to turn to the European Union’s bailout fund for financially distressed member nations.

Portugal would be the third EU member to seek a bailout, after Greece and Ireland did last year.

The annualized yield on two-year Portuguese government bonds rose to 6.61% before Socrates quit Wednesday, up from 6.50% on Tuesday and the highest since the late-1990s. The yield has soared from 3% in late October.

Portugal’s failure to agree on a budget plan comes ahead of EU leaders’ summit beginning Thursday. They are expected to finalize a permanent bailout fund for member countries that would launch in 2013.

But Portugal would have to tap the interim fund that Greece and Ireland used, and Reuters reported that EU leaders will defer until June a decision on beefing up the interim fund.

The delay “is likely to be a disappointment to financial markets, because the summit had been built up as being a definitive moment, with leaders finally taking the decisions needed to get on top of the year-long debt crisis,” Reuters’ Julien Toyer and Luke Bake wrote from Brussels.

Meanwhile, Ireland has been chafing over the terms of its EU bailout, and wants a better deal. Irish government bond yields continued to surge on Wednesday amid investor jitters, with the two-year bond yield reaching 10.25%, up from 9.87% on Tuesday.

The bigger concern is that, if Portugal needs a bailout, investors may begin to bet that struggling Spain will follow. Spain is the world's 12th-largest economy.

Still, European stock markets, at least, may be getting bored with the whole bailout drama: Euro-zone markets mostly closed modestly higher Wednesday, despite expectations that Portugal’s government would fall.

Stocks have been rebounding in recent days after tumbling since mid-February on concerns about Middle East unrest and then Japan’s nuclear disaster.

-- Tom Petruno

Photo: Portuguese Prime Minister Jose Socrates announcing his resignation on Wednesday. Credit: Armando Franca / Associated Press

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