Europe tells Portugal to slash spending

(BRUSSELS) - Rocked by expectations Portugal will call in a 75-billion-euro bailout, Europe told Lisbon on Thursday to slash spending as leaders bargained a deal to end a year-long debt rollercoaster.

Led by German Chancellor Angela Merkel, top figures insisted Portugal's options were limited, with massive savings on spending required even if it seeks to negotiate a financial rescue package such as those given Greece and Ireland.

The two-day European Union summit was called to bolster defences against a eurozone debt crisis, but the overnight resignation of Portuguese premier Jose Socrates seriously undermined efforts to promote new shared economic goals.

A "Euro Plus Pact" asking adherents to work off annual targets against economic benchmarks to ensure economic policies converge was the target of demonstrators who hurled rocks at police outside the summit venue.

Up to 20,000 protested plans to cut European wage levels and raise retirement ages, but non-euro Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania signed up to the wishlist of goals, although Sweden, Hungary, the Czech Republic and Malta declared opposition.

"Those hoping that this summit will draw a line under the crisis will be hugely disappointed," noted analyst Sony Kapoor of the Re-Define think tank.

Portugal's Socrates quit office after the Lisbon parliament rejected a new national austerity plan. He cut a forlorn figure at the summit alongside Greek Prime Minister George Papandreou and Irish counterpart Enda Kenny as Fitch Ratings downgraded Portugal two notches to 'A-.'

But EU officials ruled out a decision on an emergency financial rescue for Portugal until it is clear who will govern the country.

Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of eurozone finance ministers, said should Portugal require assistance, aid of some 75 billion euros (almost $100 billion) would be "approriate," but only "under strict conditions."

European Commission chief Jose Manuel Barroso, a former Portuguese premier himself, warned that the cuts voted down by parliament in Lisbon remain "indispensable".

Merkel said "it is very, very important that all those who speak in Portugal's name state clearly their attachment to the objectives of this programme" to rein in the national deficit.

Lisbon faces increased borrowing costs in the countdown to bond repayments amounting to nine billion euros falling due by June 15.

Its public deficit hit a record 9.3 percent of GDP in 2009 and current money market rates of nearly 7.5 percent are considered unsustainable.

Should there be a bailout, it would be funded by a temporary European Financial Stability Facility.

Notionally worth 440 billion euros, in reality the fund today is capable only of lending around 200 billion -- and Finnish President Mari Kiviniemi confirmed that Helsinki cannot increase its share of EFSF guarantees as partners wanted before April 17 elections.

The EFSF is to be replaced by a permanent European Stability Mechanism in 2013 but EU leaders Thursday were facing a last-minute demand from Merkel to renegotiate Berlin's contributions to the warchest-to-be.

Merkel wants to spread a 22-billion contribution over five years instead of three.

Meanwhile, Britain and the Netherlands pushed a trade agenda, seeking to move the economic focus onto growth-enhancing measures.

They want to remove barriers within the EU to the services business and speed up preferential trade deals with the likes of Brazil, India and Japan.

European Council