33 mins ago
LISBON, Portugal – Opposition parties in Portugal have defeated a government austerity plan and passed their own bill allowing the country's regions to rack up more debt.
The minority Socialist government fiercely opposed the bill that was passed Friday, which raises strong questions about whether Portugal can deliver on promises to prune its swollen budget deficit.
The move is likely to further unsettle world financial markets.
World stocks slipped again Friday as investors fretted over the European debt crisis. They fear that the financial troubles gripping Greece may spread to other vulnerable eurozone countries such as Portugal and Spain.
THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.
LISBON, Portugal (AP) — Portugal's minority government faces a showdown with opposition parties Friday over its austerity plan, bringing another test of Europe's commitment to tackling its swollen budget deficits.
Investors fear Portugal, Western Europe's poorest country, might go the same way as Greece where a financial crisis has sent a shudder through the European Union and weakened the euro. Portugal and Greece are among the 16 EU countries which use the shared currency.
Portugal's center-left Socialist government wants to reassure financial markets it will abide by its state budget, presented last month, which includes a commitment to bring the deficit to below the 3 percent limit for euro zone countries by 2013. The deficit is expected to have reached a record 9.3 percent of gross domestic product last year.
But opposition parties have united behind a proposal to allow the Azores and Madeira islands to rack up debt.
That plan would punch a euro400 million (US$550 million) hole in the government's budget over the next four years. The opposition parties together have enough votes to push the proposal through in Friday's parliamentary session.
Finance Minister Fernando Teixeira dos Santos said in a televised address late Thursday that the proposal would have "grave consequences" for state finances. He urged the opposition parties to back off from the plan.
"We couldn't send a worse signal at this juncture," he said. He vowed to use all the legal and political means at his disposal to stop the proposal.
"In life, we sometimes come to a line we cannot cross. This is one of them," Teixeira dos Santos said.
Prime Minister Jose Socrates and Manuela Ferreira Leite, leader of the main opposition Social Democratic Party, met in private late Thursday as high-level negotiations took place. They made no comment to reporters.
On Friday, unions will hold their first protest against spending cuts devised to reduce the deficit. Greece is facing a wave of strikes.
Portugal's state budget foresees cuts in government jobs, a freeze on civil servants' pay and curbs on spending. The center-left government has refused to hike taxes.
The Lisbon Stock Exchange felt the effects of the political antagonism and financial worries Thursday when the benchmark PSI-20 index sank by almost 5 percent — its steepest drop in 16 months.
The dip came after the cost of insuring against losses on Portuguese government debt surged to an all-time high, underlining market concerns that the country will have trouble financing its ballooning deficit.
The drop follows news that a government bond issue had to be reduced to euro300 million ($415 million) from a planned euro500 million ($693 million) Wednesday in light of the rising cost of borrowing.
Teixeira dos Santos says his plan will bring the deficit down to 8.3 percent this year. Public debt is expected to climb to 85.4 percent of GDP this year, up from 76.6 per cent in 2009, as the government invests in the economy and increases welfare payouts amid rising unemployment.
http://news.yahoo.com/s/ap/20100205/ap_ ... ial_crisis
