Portugal vowed Thursday to "do all it can" to avert a bailout after Prime Minister Jose Socrates stepped down following a showdown with parliament over his minority government's latest austerity plan.
Socrates, in power since 2005, tendered his resignation late Wednesday, saying he could not govern without support after all five opposition parties voted against his fourth programme in a year of spending cuts and tax hikes.
The austerity plan was aimed at avoiding the need for an EU-IMF bailout to help Lisbon meet debt repayment obligations, a package similar to those granted fellow eurozone members Greece and Ireland last year.
"This crisis will have very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets," Socrates said after presenting his resignation to President Anibal Cavaco Silva.
The events in Portugal threatened to derail a two-day European Union summit that got underway Thursday in Brussels expected to finalise the bloc's response to a year-long eurozone debt crisis. Diplomats virtually ruled out any EU decision on an emergency financial rescue for Portugal during the gathering but Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of eurozone finance ministers, said aid of some 75 billion euros (almost $100 billion) would be "appropriate."
Speaking in Lisbon, Portuguese cabinet spokesman Pedro Silva Pereira said a bailout was not in the "national interest." Greece and Ireland are paying higher interest rates on their debt than before they received outside aid, he noted.
"The government will fight and continue to do all it can to avoid resorting to external aid which would have very serious consequences for the economy," Silva Pereira said.Many analysts think it only a matter of time before Portugal seeks help.
The country will need to raise 28 billion euros to meet debt repayments over the next three years and another 29 billion euros to cover the budget deficit, said Christoph Weil, senior economist at Commerzbank in Frankfurt.
"I expect that Portugal will have to ask the EU for help in the next couple of weeks," he said.
Fitch, one of the top three ratings agencies, cut Portugal's credit ratings Thursday by two notches and said further downgrades were possible, saying risks to Lisbon's financing rose after parliament failed to pass the austerity plan.
"It has therefore significantly increased the chances of Portugal requiring multilateral support in the near term," it said. The president can now invite the political parties in parliament to form a coalition government or, in the more likely scenario, he can dissolve parliament and call snap elections.
If he opts for fresh elections, the vote must be held at least 55 days after they are called.
The Socialists would be at the helm of a caretaker government with limited powers for weeks under this scenario.
Socrates, who once famously described himself as a "ferocious animal" in politics, has said he would stand again for election. The main opposition centre-right PSD has a lead over the Socialist Party in opinion polls but is not sure of winning an absolute majority. Political commentator Manuel Villaverde Cabral, a sociologist at Lisbon University, said the PSD would likely seek to govern with the support of the tiny conservative CDS party.
But he said the re-election of the Socialists could not be ruled out "because the ferocious animal is not a bad candidate." Sebastiao Nogueira, a 58-year-old optician, said the political crisis came at "the worst moment.
"What is going to happen in the short-term is disastrous, it means the arrival of the IMF and people are going to suffer more than they have up until now," he said.