Portugal faces dire straits as budget talks fail

Talks between the minority Socialist government in Portugal and the main opposition Social Democrat Party (PSD) on the 2011 austerity budget broke down on Wednesday, threatening its passage in parliament and raising the specter of economic and political upheaval in a country struggling to come to grips with its yawning public deficit.

"If the budget isn't passed the country will be immersed in a serious financial crisis with grave economic consequences," Finance Minister Fernando Teixeira dos Santos said. Portugal could find its access to international finance "blocked," he continued.

Investors had been expecting an agreement and news of the breakdown made itself felt immediately in the financial markets. Portugal's country-risk premium widened, spilling over onto Greece and Ireland, other peripheral euro-zone countries with serious deficit problems.

"If the budget isn't passed, the country will be immersed in serious financial consequences"

Negotiations with the PSD, whose support the Socialists need to get the budget through parliament, had been ongoing for the past week. Walking out of the talks on Wednesday, the PSD's economic spokesman and former finance minister, Eduardo Catroga, accused the government of inflexibility. "There is no possibility of continuing the negotiating process," he said.

The government is looking to reduce the budget deficit from 9.3 percent of GDP last year to 4.6 percent in 2011 through spending cuts and tax hikes, the latter being the main bone of contention of the PSD.

President Aníbal Cavaco Silva on Wednesday called a meeting of the Council of State to discuss the 2011 budget and the political situation.