LISBON, Portugal - Portugal's financial collapse appeared inevitable on Thursday, as markets took the government's resignation as proof the debt-heavy country will lose its year-long battle to avoid a bailout.
Investors pushed the interest rate on Portugal's 10-year bonds to a euro-era record of 7.71 per cent -- an unsustainable financial burden that could soon force the country to ask for a rescue like Greece and Ireland did last year. Analysts estimate a bailout would amount to euro80 billion (US$113.02 billion).
The Socialist government quit late Wednesday after opposition parties rejected its latest debt-reduction plan, generating new market jitters and likely shortening the time the country can hold out before asking for help.
Portugal's outgoing minister for the Cabinet, Pedro Silva Pereira, said the Socialist Party will continue to resist a rescue that would frighten away investors and could delay recovery for years.
But Juergen Michels, an economist at Citigroup in London, said a bailout for Portugal is firmly on the cards.
The government's resignation "shows that the problems are really huge and unless the market is supportive, (Portugal) will need help — and the markets aren't supportive at the moment," he said.
It is unclear how soon Portugal could take a bailout, as experts say it is unlikely that an interim government will have the constitutional authority to negotiate assistance on the country's behalf. Elections would not be possible before the end of May, leaving months of unwelcome -- and costly -- uncertainty ahead.
The leader of Portugal's main opposition party said the outgoing prime minister had no mandate to negotiate a bailout. Social Democratic Party leader Passos Coelho, who had backed debt reduction plans before rejecting the latest austerity package, said in Brussels he didn't know whether Portugal needed help because he didn't have complete information about national accounts.
The two main parties are under strong pressure to compromise in a bi-partisan agreement, which Portugal's head of state may try to broker in talks scheduled for Friday.
"The important thing is that, as quickly as possible ... there is a national consensus on the need to meet the goals Portugal has set for reducing its deficit and debt levels," European Commission president Jose Manuel Barroso told reporters in Brussels.
The upheaval in Portugal was a blow for European leaders who are trying to reassure markets about the soundness of investments in the 17-nation eurozone. However, market movements showed few fears that the market pressures that are bringing down Portugal will spread to another country, such as Spain.
A European Union summit in Brussels on Thursday will seek to finalize measures aimed at finally drawing a line under the sovereign debt crisis dogging the continent.
The Portuguese prime minister's resignation was the latest political blowback from a crisis that has forced painful retrenchment across Europe, darkening prospects for growth and jobs. Portugal's jobless rate stands at a record 11.2 per cent. In neighboring Spain, which has to a lesser extent been rattled by investor fears about its heavy debts, unemployment is above 20 per cent.
Debt problems likewise brought down Ireland's government earlier this year after it took a bailout and enacted severe cutbacks, forcing an election that was won by the main opposition party.
German Chancellor Angela Merkel said Thursday that "a consistent path of consolidation and reform is essential." Events in Portugal show "how much political courage is needed when things didn't go right in the past," she told German lawmakers.
In the streets of Lisbon there was mood of resignation and dismay on a day that subway workers walked off the job in the latest of a wave of strikes protesting austerity measures that have included tax hikes and pay cuts.
Filipa Ferreira, a 45-year-old engineer, said the crisis had discredited the country's leaders. "Our politicians can't cope with the scale of this crisis," she said.
Fernando Gomes, a part-time gardener, shrugged his shoulders at the latest developments in a country that is one of western Europe's poorest. "It just means more years of hardship for us," the 63-year-old said, shaking his head.
As Portugal's borrowing costs rose steadily over the past year, the government has fought to avoid asking its EU partners and the International Monetary Fund for rescue because the package comes with fiscal conditions that limit a country's ability to decide its own policies.
But markets were unlikely to ease the pressure. "In the near term, we suspect bond yields will keep pushing higher, if only because uncertainty will prevail," Barclays Capital said.
The borrowing costs are critical as Portugal faces two major bond redemptions soon. The outgoing government has said Portugal has enough cash in reserve to meet a euro4.5 billion (US$6.4 billion) repayment next month, but a similar sum due in June could be harder to find -- perhaps marking the time for a financial aid request.
Under the Constitution, a caretaker government is confined to "acts strictly necessary to ensure the management of public business." The scope of those powers has been widely debated by experts, but it is unlikely to grant the authority to request a bailout unless mandated by Parliament and with the consent of the head of state.
Portugal's woes aren't confined to its deep debt, racked up during a decade of meager growth. The country's abiding problem is a reluctance to surrender entitlements and adopt reforms that would improve productivity and make it more competitive.
The EU has long pushed Portugal to introduce changes to its restrictive labor laws which protect jobs but stifle competition, reduce bureaucracy and trim overstaffed public services.
The Portuguese face a long road out of their economic doldrums. The Bank of Portugal predicts a double-dip recession this year as austerity measures bite into growth for years to come. Unemployment is already at a record 11.2 per cent.
