Portugal's PM forced out over budget plans

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Portugal's leader, Jose Socrates, was forced to resign last night after opposition parties said they could not back his minority Socialist government's austerity plan – making a financial bailout of one of Europe's weakest economies almost certain.

The rejection "had taken away from the government all conditions to govern", the Prime Minister said in a televised statement. Opinion polls put Pedro Passos Coelho, the leader of Social Democratic party (PSD), Portugal's largest opposition group, as the frontrunner for the next prime minister.

Mr Socrates' cost-cutting plan had involved raising taxes and introducing the deepest spending cuts in three decades – an unpopular combination, but something the government claimed was necessary to decrease debt and avoid a bailout.

The European Union, which has already scheduled a two-day summit in Brussels starting today to hammer out its plan for dealing with the eurozone's burgeoning debt crisis, will be forced to discuss Portugal's future. Markets have been predicting a Portuguese bailout since Greece and Ireland sought similar rescues last year.

Earlier this month, the Finance Minister, Fernando Teixeira dos Santos, announced cost-saving measures worth up to 4.5 per cent of gross domestic product over three years. During yesterday's debate, he said the political crisis could bring a bailout closer and lead to even greater sacrifices for the Portuguese. "Rejecting (this plan) will worsen financial market conditions, bringing additional difficulties for the country's financing which I doubt we will be able to bear on our own."

The opposition PSD and Communist parties and the Left Bloc group had already said on Tuesday that they would vote against the Socialist plan.

Mr Socrates' Socialist Party was elected in 2005 and 2009, but the last victory did not give it a majority in parliament. The PSD allowed the government's 2011 budget plan to pass through parliament in October by abstaining.

The markets yesterday took a dim view of Portugal's chances of avoiding a bailout: "Without a strong structural reform agenda, in our view, it is very unlikely that Portugal can grow out of its indebtedness," analysts at Barclays Capital said. Moody's credit ratings agency last week cut Portugal's rating two notches to A3, just four steps from junk, and gave it a "negative" outlook.

While a serious downturn for the euro, the Portuguese crisis has not taken markets by surprise. The question of the EU's financial stature depends on whether Spain follows suit. There are also concerns about the long-term viability of the Belgian and Italian economies without eurozone intervention.

Spanish banks, are being closely monitored as part of a recent consolidation of the financial sector. The Bank of Spain says the sector needs around €15bn (£13bn) to meet minimum capital levels imposed by the government.