Europe Economy

Portugal Adds Political Crisis to Debt Woes Mix

Carolina Cimenti, CNBC reporter

Portuguese authorities' favorite expression is: Portugal is not Greece. Everybody, from the country's central bank governor to economists in private banks, says this.

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Portugal doesn't have the same debt level as Greece and, so far, it is not showing signs of social unrest. But the country has added a new ingredient to its crisis that Greece doesn't have: a growing political crisis.

Prime Minister José Sócrates was re-elected last year, but his Socialist Party lost its majority in the Portuguese parliament. Since then, the opposition parties have been playing very hard to show the world the government is not completely in control of the economy.

It already made its point when Lisbon presented the country's budget for 2010 last week. The opposition took any sign of ambition away from the budget, transforming it into a very disappointing announcement for the markets — with absolutely no spending cuts, only a public wage freeze for the year.

Portugal's opposition-dominated parliament passed on Friday a bill on regional finances, defeating the Socialist government that had warned that the law is unacceptable as it would increase the budget deficit.

The Regional Financing law increases the limit for autonomous regions (Madera and Azores) to be indebted. Back in 2007, Prime Minister Socrates changed this law, cutting the amount of debt the regions could have. Now the parliament, lead by the opposition, is making these rules more flexible, which will end up increasing the country's budget deficit.

Lawmakers cast 127 votes in favor of the law and 87 voted against in the 230-seat parliament, lawmakers said.

Wrong Message, Bad Timing

The problem with approving the bill is not necessarily increasing spending in Portugal, as this increase would be below 0.1 percent of gross domestic product.

The main issue here is that this is "the wrong message to the markets at the worst possible time," Portuguese finance minister, Fernando Teixeira dos Santos said. And also, it highlights the growing political crisis.

Share prices in Lisbon fell by more than 4 percent Thursday and are still under pressure Friday. The yields on 10-year government bonds rose 12.1 basis points to 4.81 percent, the highest level for almost a year, meaning the cost of insuring Portuguese debt hit a record high.

The prime minister had already denied rumors that he would step down if the bill passes, but the finance minister has confirmed that if this law is adopted, it will be proof that the government cannot rule and therefore he might leave his job.

But even more important, in a couple of weeks time Portugal will have to present to the European Commission a fiscal consolidation plan to achieve a budget deficit lower than 3 percent by 2013.

For this, it will have to negotiate with the opposition parties once again the possibility of spending cuts. And in the current climate, it looks like the Portuguese government's room for maneuver is extremely limited.

- Reuters contributed to this report.