Portuguese Parliament Rejects Austerity Plan, PM Socrates Resigns

[Pale Blue Dot]

Source: Forbes

Portugal’s government rejected Prime Minister Jose Socrates’ fourth wave of austerity plans just after the bell on Wednesday. Socrates who had threatened to resign if opposition Social Democratic and Communist parties didn’t pass his austerity package, presented his resignation to the country’s president, setting the stage for Portugal to tap ESFS bailout funds.

Socrates’ resignation leaves behind a political vacuum that is sure to difficult any negotiations with the EU as to a rescue package. Yields on benchmark 10-year Portuguese bonds jumped 35 basis points through the day’s session as the cost to insure against Portuguese default, as measured by credit default swaps, gained 10.5 basis points to 544.5, its highest level since they reached a record 555 on January 10, according to Bloomberg.

The discussion will surely now turn to the European Financial Stability Facility (EFSF), which presumably Portugal will be forced to tap. On Tuesday, JP Morgan Chase’s Nicola Mai anticipated that the “likelihood that the Portuguese government t will fall this week looks high” while noting that “the sovereign will likely access the EFSF in the near term, despite the current government’s efforts to avoid this outcome.”

While the IMF announced it had not received any requests from Portugal for financial assistance, it is expected that whoever takes the reins in Lisbon will have to negotiate with both the IMF and the EU. Plans to restructure Europe’s bailout fund to give it more firepower were delayed on Wednesday to June due to elections and “internal procedures,” according to Bloomberg, adding market uncertainty. Speaking on condition of anonymity, a European official said the EU was committed to boosting the EFSF’s lending capacity to €440 billion ($622 billion).

Read more: http://blogs.forbes.com/afontevecchia/2011/03/23/portuguese-parliament-rejects-austerity-plan-pm-socrates-to-resign/