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Portugal euro crisis dashes our hopes of interest cut

HOPES of getting a reduction to the punitive interest rate on the EU/IMF bailout evaporated today as the eurozone was plunged into a fresh crisis.

Enda Kenny's plans to negotiate the deal were "parked" as Portugal lingered on the verge following Greece and Ireland into a financial rescue package.

The Portuguese Prime Minister Jose Socrates resigned last night after the parliament rejected its fourth austerity budget in 12 months sparking fresh fears of a renewed crisis.

Ireland's problems now also seem likely to be heightened by the results of stress tests on the banks which are due in the coming weeks.

There are serious concerns that rescuing Irish banks could cost more than the €35bn agreed in the original bailout deal. This would severely weaken Ireland's bargaining power with our EU counterparts and could result in even tougher budget cuts here.

As a result, Mr Kenny is unlikely to seek any concessions from his European counterparts when he attends a summit of EU leaders in Brussels today.

Instead, Europe is set to wait until the final results of the stress tests are available.

Mr Kenny came face-to-face with German Chancellor Angela Merkel at a meeting of EPP colleagues on the fringes of the Brussels summit.

However, tensions over corporation tax are also likely to be put to one side while the leaders try to calm markets.

The summit will push ahead with plans to secure "a grand bargain" for solving the debt crisis, but the Portuguese crisis has put this in doubt.

Mr Kenny will use his first full meeting of EU leaders to highlight the efforts Ireland has made to bring its finances under control.

He will note the contribution made by ordinary taxpayers and how his new administration intends to develop tight budgetary controls.

The Government may then seek to revisit the issue of interest rates at a meeting of finance ministers in Hungary at the start of April.

A spokesman for Portugal's Prime Minister has said that he will attend the summit regardless of his situation on the home front.

And Portuguese president Anibal Cavaco Silva said the government will retain its powers until he accepts Socrates' resignation.

The country has already raised taxes and implemented the deepest spending cuts in more than three decades to convince investors it can reduce its budget shortfall.

However, like Greece and Ireland, it has seen borrowing costs soar to what the government admits are unsustainable levels amid fears that it will default on its debts.

kdoyle@herald.ie