Solidarity in Portugal crumbles over debt

The expensive cars parked outside the offices of Aguas de Portugal, in Lisbon, have become a flashpoint for the nation's worsening debt crisis.

Last week, it emerged that the state-owned water company had bought 34 top-of-the-range BMWs, Renaults and Citroens for its managers, adding to the pile of government debt that is once again spooking markets.

Last week, the Government stepped in, banning the company from buying more vehicles.

Lisbon had navigated its way discreetly through the eurozone debt crisis this year by promising tough measures and presenting a united front to the world.

While Greece burned and Spain delayed, Portugal's socialist Prime Minister Jose Socrates pledged austerity. A 9.4 per cent deficit would be hacked back to 2.8 per cent by 2013, he said.

Measures being considered ranged from tax rises to the sale of state-owned companies, including the diamond prospector Sociedade Portuguesa de Empreendimentos.

Markets watched, but had more frightening places to worry about. But last week the yield spread against German bonds widened to record levels, making Lisbon's debt more expensive.

As Socrates tried to head off a second attack on the country's debt last week, the centre-right opposition Social Democrat Party, which had put up a united front, stepped aside.

"We are the only country in the EU which is in serious difficulty, in which spending is rising and not falling," its leader in Parliament, Miguel Macedo, said.

A rumour began that Brussels would be sending senior officials to audit the country's accounts and a spokesman for EU budget commissioner Janusz Lewandowski had to deny that things had got quite that bad.

But where will they go next? Portugal successfully auctioned €750 million ($1.37 billion) in bonds last Wednesday but its difficulties predate the global crash.

A decade of chronically low growth was already a sign something was going wrong.

Poor competitiveness and high labour costs are usually blamed.

The crisis has simply highlighted its need to transform an economy once based on cheap labour into something new.

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