Budget talks between Portugal's Socialist government and the main opposition party ended on Wednesday without a deal, raising the risk of a political and financial crisis in one of the euro zone's weakest members.
Because the government of Prime Minister Jose Socrates lacks a majority in parliament, it needs the opposition Social Democrats (PSD) to agree to support its budget bill or abstain from the vote to ensure passage.
The two sides have been at loggerheads over how to cut Portugal's swollen deficit, with the PSD insisting that spending cuts should have priority and the government preferring a more balanced approach that includes tax hikes.
Portugal's partners in the 16-nation currency bloc have heaped pressure on both sides to strike an agreement before a first vote in parliament on Nov.3, but the talks collapsed on Wednesday without a consensus.
Socrates has threatened to resign if the budget is not approved and ministers have warned that Portugal could be forced to seek a financial rescue, as Greece did earlier this year.
"The negotiations ended and there is no agreement," said a PSD spokesman.
Finance Minister Fernando Teixeira dos Santos said there would be no further talks.
He said the government had been unwilling to abandon its deficit goals in the face of PSD pressure and warned Portugal would face a financial crisis if the budget was not passed.
"The scenario that I see if that happens is very worrying, it will push the country into a very deep financial crisis," Teixeira dos Santos said.
The spread between Portuguese 10-year bond yields and German benchmark issues shot to 332 basis points, up from 312 earlier in the session, on news the talks had ended without a deal.
After hitting lifetime highs at the end of September, the spread — a gauge of investor sentiment on the country's financial health — narrowed in recent days on hopes of a budget compromise.
Forced to Seek Rescue
Rui Barbara, an economist at Banco Carregosa, said this could well mean that Portugal will have to seek financing from international institutions.
"Without this agreement to approve the budget we are going to go through a very difficult political and financial situation, and there is a possibility that the IMF will come, possibly at the start of 2011," Barbara said.
Eduardo Catroga, the PSD budget negotiator, said his party had made proposals which were rejected by the government and that until Tuesday he had thought an agreement was possible.
"The government wants to sacrifice the country without doing its home work to cut spending," Catroga told reporters after the talks ended Wednesday morning.
The PSD said its national political commission, which will decide how the party votes on the budget, would meet at 5 p.m and make a statement afterwards.
President Anibal Cavaco Silva said he would hold a meeting on Friday of the state council — an organ which offers him advice on key political matters — to discuss the budget and the political situation.
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