Portugal rejects EU bailout but looks at Brazilian handout Struggling prime minister José Só

In the port district of Lisbon a steady trickle of young people pick their way through cobbled streets towards the Angolan consulate. Unskilled Africans may still be heading for Europe via the toe of Italy but, as their own country’s domestic crisis deepens, many educated Portuguese head the other way.

On 23 March, the socialist minority government of José Sócrates collapsed after the conservative opposition pulled the plug on the fourth package of deficit-cutting measures designed to appease Portugal’s creditors – notably the EU, meeting two days later. Ratings agencies cut Portugal’s status, twice, to triple B-minus, one notch above a junk bond and interest rates on five-year government borrowing rose above a crippling 9%. More than double Germany’s, it leaves most political and financial analysts convinced Portugal cannot avoid the kind of financial bailout which the EU and IMF forced on Greece and Ireland before €9bn (£8bn) becomes repayable in April and June.

Yet the combative Sócrates insists “Portugal doesn’t need to tap into any bailout” and says – “in defence of my country” – he will prevent it happening. Some opposition MPs want a grand coalition, others an election campaign which, Portuguese law states, must last a full 55 days. EU summiteers were unenthusiastic.

On Thursday night president Aníbal Cavaco Silva, a 71-year-old technocrat and former liberal-conservative prime minister, was holding an emergency session of Portugal’s council of state to seal a political deal without which the debt crisis can only worsen.

Silva’s task: to decide if – and when – to grant demands for an election as ministers resist pressure to accept an IMF/EU rescue, part of the “grand bargain” of measures designed to stem financial “contagion” over the fear of a debt default within the debt-strapped eurozone. Local unemployment is already in excess of 11% and Portugal is braced for renewed recession. So the grim-faced visitors to the Angolan consulate had already made their personal decisions to seek opportunity in London, Amsterdam or, increasingly, in former colonies such as Brazil and Angola.

“Our economy is very complicated, some people think it’s suicidal,” said a young woman handing out fliers to advertise her nearby photographic shop where . Just round the corner would-be migrants can fill in their paperwork there on visa applications. “Many friends have gone. I don’t know if Angola needs photographers, but I love the idea of working there. I do know Brazil and love it.”

Like Britain, whose global maritime empire did not last as long as Portugal’s, Lisbon has a long history of two-way migration. Second only to Ireland, rural Portugal traditionally exported its young – 10.7 million Portuguese in Portugal, 4 million abroad – until the boom decades inside the EU briefly reversed the trend. Now emigration is an issue again.
Portugal’s peculiar crisis

How did it come to this? On Thursday Portugal’s budget deficit was revised upwards to 8.6% – way over its 7.3% target, but still less than Britain’s. Its accumulated debt, around 88% of GDP, is lower than Italy or Japan. Nor did Portugal enjoy a perilous boom-and-bust decade of rising wages inside the eurozone. Its banks did not go mad and build ghost housing estates like Ireland’s – or underwrite their subsequent bankruptcy as Dublin’s government rashly did.

As elsewhere in what the Chinese are calling “the North Atlantic crisis” Portugal’s post-2007 crisis was similar to its neighbours but peculiar to itself, rooted in habits that pre-date even the “Carnation Revolution”, which peacefully ended 50 years of dictatorship in 1974.

“The problem of our democratic framework is we do not have a political system strong enough to say ‘No more money’ to the demands of private interest groups and some state groups,” says Professor João Confraria of Lisbon’s Catholic business university, FCEE-Católica. “We have failed to forge a viable domestic consensus for 150 years.”

Life goes on much as usual. Lisboners complain of shrinking budgets and rising prices. But their modern European city is criss-crossed by enviably wide boulevards, enough for six lanes of cars, and orderly rows of shade-giving trees just coming into leaf in the spring sunshine. Bars are busy and both Coldplay and Bon Jovi are soon to tour at the Hard Rock Café. The crisis bubbles away below the surface.

During Portugal’s modernising years, low productivity in industries such as textiles – vulnerable to emerging market producers – were sustained by EU cash transfers, by remittances from workers overseas, by foreign investment and foreign borrowing. “For 20 years we have been running a current account [trade] deficit close to 10%,” says Confraria.

As conditions tightened across the EU – and the emerging Bric nations, including Brazil, rebalanced the world economy – the fix became unsustainable. Little wonder that the Portuguese, who know their country was briefly a United Kingdom with Brazil in the 19th century, look to their 190 millon-strong offspring for succour, even more than Brits cherish their “special relationship” with the US.

Just as China (to whom Portugal returned Macao only in 1999, two years after Hong Kong) has offered to buy some of Lisbon’s debt, so Brazil’s new president, Dilma Rousseff, made a similar pledge to help out. “We could simply merge with Brazil instead of with the EU,” say Lisbon wits. In 2008 parliament here did what Westminster would find unbearable: it voted to adopt Brazilian spellings as the best way to protect their shared global language.

But the immediate double problem, political and financial, is European. Sócrates, PM since 2005 and re-elected for five years 18 months ago, has cut wages, pensions and benefits and raised taxes in three packages which the main opposition, the centre-right social Democrats (PSD) endorsed. But last month, they balked at a fourth, triggering Sócrates’s resignation, to the dismay of Brussels.

A squeeze too far? Or mere opportunism? “The political crisis is not our fault. We brought in new measures on which the European commission and others had been briefed,” the government’s spokesman, Mafalda Pereira, told the Guardian. Finance minister Carlos Costa Pinas says the “cost of financing [the debt] was substantially worsened by the opposition”.

But the PSD is clearly banking on the electorate to repudiate a socialist (PS) government that has inflicted so much pain, as Irish voters brutally ejected Fianna Fáil. With 81 seats against the PS’s 91 in the 230-deputy chamber, the PSD, led by businessman, Pedro Passos Coelho, is 10% ahead in recent polls. It knows that it can obtain an overall majority in tandem with smaller, more conservative rivals, as the PS cannot do on the left.

“A left coalition is not possible for several reasons, ideological and historic” says André Freire of the Lisbon University Institute’s political science department. “The left bloc is libertarian and the communists are orthodox. There is a lack of willingness to compromise.”

As for the grand coalition option to meet the crisis, the PSD has been in informal coalition to support PS austerity up to now. But Portuguese politics are notorious for “bickering and point-scoring” among the very male MPs whose faces dominate TV news. War reports from Libya this week have waited 20 minutes while bulletins examine rising bond market prices.

“Will voters blame the government or the opposition? That is the million-dollar question. It depends on which of the major challengers best gets his message across,” Freire admits. “Whoever wins, it is difficult to understand how they will provide different answers.” The omens are not good.

Huge demonstrations shook the political elite in November and 24-hour transport strikes continue. Fewer than 50% of voters turned out to re-elect Silva in January. Polls suggest Portugal does not want an early election; it wants the politicians to sort out the mess.