Lisbon: Portuguese Prime Minister Jose Socrates resigned on Wednesday on the eve of a key EU summit on the eurozone debt crisis after Parliament rejected his minority government`s latest austerity plan.
All five opposition parties voted against his Socialist government`s fourth cost-cutting plan in a year, aimed at avoiding a multi-billion euro financial bailout like those granted Greece and Ireland last year.
The political drama threatens to derail a two-day summit that gets under way in Brussels on Thursday which expected to finalise the bloc`s response to a eurozone debt crisis.
It also will increase borrowing costs for the Portuguese government as it faces bond replayments amounting to EUR 9 billion (USD 12.9 billion) falling due by June 15, increasing the probability that Lisbon will seek a bailout.
"The opposition removed from the government the conditions to govern. As a result I have presented my resignation to the president," Socrates said after meeting with President Anibal Cavaco Silva for about 20 minutes.
"This crisis will have very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets. So from now on it is those who provoked it who will be responsible for its consequences."
The euro fell sharply against the dollar on Wednesday due to market fears that events in Portugal would undercut the EU summit and stoke the year-long eurozone debt crisis.
At around 9:00 pm (2100 GMT), shortly after Socrates` resignation announcement, the single currency traded at USD 1.4083, down from USD 1.4196 at the same time on Tuesday.
"Portugal’s precarious financial situation means that a political crisis could not come at a worse time," said Kathleen Brooks at Forex.com.
"If these reforms don’t get passed then Portugal will be pushed even closer to a bailout, something it has just about managed to avoid. But while a bailout of Portugal by itself wouldn’t be enough to spook the markets, it could derail the EU summit."
The government had argued that the new austerity plan would "guarantee" that Portugal`s public deficit would fall to below an EU limit of 3.0 percent of gross domestic product by 2013.
Portugal`s public deficit hit a record 9.3 percent of GDP in 2009, the fourth-biggest in the euro region after Ireland, Greece and Spain.
The main opposition centre-right Social Democratic Party (PSD) had allowed past austerity plans to pass by abstaining from voting.
But this time around it opposed the measures, arguing that they hurt the weakest members of society hardest.
PSD leader Pedro Passos Coelho, who at 46 is considered a potential successor to Socrates, has said early elections have become "inevitable" and were needed so a new government can regain market trust.
Socrates became prime minister in 2005 and his Socialist Party won re-election in 2009 but lost its majority in Parliament. The Socialists can count on the support of only 97 members in the 230-seat Parliament.
He had warned that he would resign if Parliament did not back his government`s latest austerity measures and would stand for re-election if there are early elections.
Under the Portuguese Constitution, the Prime Minister has to present his resignation to the President, who acts as head of state.
The President can then invite parties with representation in Parliament to form a coalition government or, in the more likely scenario, he can dissolve Parliament and call snap elections.
If the President calls fresh elections, the vote must be held at least 55 days after they are called.
That would leave the Socialists at the helm as a caretaker government with limited powers.