Portugals Disaster - A New Crisis for the Euro Currency ?

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Portugal's parliament rejected a new government austerity plan Wednesday, spurring the resignation of Prime Minister José Sócrates and setting off a new part in Europe's sovereign-debt crisis.

Portugal's Prime Minister Jose Socrates, left, gestures beside Finance Minister Fernando Teixeira dos Santos throughout a parliament session in Lisbon on Wednesday.

The failure to pass the measure, after a heated debate, threatened to push already-excessive government borrowing prices to unaffordable levels and pressure Lisbon to seek a bailout.

That might make Portugal the third among the many 17 nations that use the euro to use for help from other members of the European Union and the International Monetary Fund. Greece and Ireland went first.

The events in Portugal could provide a sign of whether the euro zone's debt travails shall be contained inside three small nations or start to undermine greater economies.

There's loads of cash in Europe's bailout funds to deal with Portugal's likely financing needs over the next few years, running into tens of billions of euros. Nevertheless, if Portugal loses entry to market finance, as now seems probably, the result could additionally be to shift consideration to Spain, the euro zone's fourth-largest financial system and the one investors have identified as its next-most-susceptible, partly due to its weak banking system.

A senior Spanish government official mentioned costs of Spain's bonds and other property may "face some short-term, speculative pressure" linked to Portugal's woes, but, as on prior events of intense market volatility, "Spain will continue shifting ahead with its reform efforts." These have included consolidation and recapitalization of native banks.

Portugal's disaster might be at the forefront of the agenda of an EU summit assembly in Brussels on Thursday. European leaders have spent current months cobbling together a complete package deal they hope will solve once and for all the euro zone's debt crisis.

Thursday's assembly is anticipated to settle a new post-2013 bailout fund, in a position to lend €500 billion, or about $710 billion, and an accord to improve nations' competitiveness. But a decision on enlarging the lending capability of the present bailout fund beyond its roughly €250 billion has been put off.

Portugal's Mr. Sócrates, who is predicted to function a caretaker prime minister till a model new government is formed or an election held, plans to attend the Brussels summit, though his negotiating and coverage-execution powers shall be very limited.

Portugal has come under quiet pressure from other European governments over a quantity of months to take a bailout, however Mr. Sócrates has resisted.

Citigroup economists stated Wednesday that a vote by parliament to reject Mr. Sócrates's austerity measures would mean rising political uncertainty that "would improve market issues and consequently...improve the probabilities that Portugal might be pressured to just accept a proper EU/IMF bailout package."
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