Portugal Debt | featured news

German Chancellor Angela Merkel praises Portugal's resolve in tackling its debt crisis, but faces angry anti-austerity protesters in Lisbon.

The Portuguese government is planning the country's biggest spending cuts in 50 years, a move it described as "unprecedented".

Portugal will elect a new government on Sunday which will lead the country through a period of deep austerity and recession after it received a 78-billion-euro ($114 billion) bailout from the European Union and IMF.

Euro zone finance ministers are ready to back an EU/IMF bailout of Portugal at a Monday meeting overshadowed by the arrest of International Monetary Fund chief Dominique Strauss-Kahn on sexual assault charges.

Portugal launched talks on Tuesday with European authorities and the IMF on a bailout the caretaker government said it needs to pay the country's dues from June, as politicians jostled ahead of a general election.

It would make sense for Portugal to seek aid from the European Union bailout fund, although such a decision will be caught up in domestic politics, European Central Bank Governing Board member Ewald Nowotny said.

European Central Bank policymakers underscored the case for an April rate hike on Thursday as Portugal's political crisis raised the prospect of another spell of reluctant ECB bond market intervention.

Portugal was put on notice on Tuesday that its credit rating could be cut and fellow euro zone debtor Spain had to pay more to issue new debt, suggesting the currency bloc's crisis will rage unabated in 2011.