No accord on debt as bailout looms for Portugal
European leaders agreed a new package of anti-crisis measures at a two-day summit, but they came away without a crucial deal to end the European debt crisis.
The abrupt resignation of Portuguese Prime Minister Jose Socrates on the eve of the meeting, after his austerity measures were rejected by parliament, cast a long shadow over the talks.
The main reason for the summit was to allow the leaders to expand the European Financial Stability Facility (EFSF) to €440bn from roughly €250bn. This would allow the EU to cope with the ongoing euro crisis. The big concern for the markets now is that this crucial deal has been pushed back until mid-year because of looming elections in Finland.
Uncertainty surrounding the true cost of Ireland's banking bailout also prevented the leaders finalising a deal on bailout costs.
Irish and Portuguese borrowing costs barely moved off their record highs. Portugal's cost of borrowing moved above 8pc to a new record yesterday, a rate seen as unsustainable for a country which needs to refinance about €4.5bn of debt in April and a similar amount in June.
Ireland's cost of borrowing hit 9.9pc. Bond markets are set to get even worse next week after the two-day conference.
The summit will now be remembered for the Portuguese problem rather than the European solution.
Portugal is widely expected to be the next eurozone country to seek a bailout after Ireland and Greece. Yesterday, Mr Socrates made clear his continued opposition to asking for a bailout, and said that whatever Portuguese government next came to power, it would stand by its fiscal commitments.
Portugal's president was consulting with political leaders in Lisbon yesterday to decide whether to call snap elections. If he does, by law they cannot be held before nearly two months have expired. Any decision on whether to seek a bailout may therefore only be taken in May, meaning more weeks of limbo for markets.
While the summit fell short of expectations, leaders were able to seal a deal on funding for the European Stability Mechanism (ESM), a new, permanent safety net that will become operational from mid-2013.
"The euro has survived a critical test but there is lots of homework to be done," German Chancellor Angela Merkel said.
"This is a comprehensive package which I think is a big step forward. Whether it will be sufficient, only time will tell."
Eurozone leaders also formally backed the 'Euro Plus Pact', a list of areas for expanded economic harmonisation.
The EU states that do not use the single currency -- Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania -- joined the 17 euro states in backing the pact, in part out of worries they could be excluded from future policy talks. Britain, Sweden, Czech Republic and Hungary remain out.
Reflecting the eurozoneuncertainty, both Standard & Poor's and Fitch cut Portugal's credit rating by two notches.
Should Lisbon opt for a rescue, senior eurozone officials have said it would likely need €60-€80bn in assistance from the EU and the IMF.