Protestors in Hyde Park. As Portugal asks for a bailout, George Osborne emphasises the need for deficit reduction. Photograph: Felix Clay for the Guardian
George Osborne used Portugal's plea for a €90bn (£79bn) rescue package to justify the government's austerity plans and warned that those who denied the need to deal with the budget deficit were "playing Russian roulette with Britain's national sovereignty".
The chancellor will join other EU finance ministers in Budapest to work out the tough terms of a bailout for Portugal after the eurozone's debt crisis claimed its third victim within a year. But he was accused by his Labour shadow, Ed Balls, of "scaremongering" after stressing that the deepening problems of the single currency had a domestic significance.
Financial markets responded calmly to the news that Portugal had finally sought help from its EU partners but, amid concerns that Spain could be the next target for speculative attack, Brussels said its plea would be treated "in the swiftest possible manner".
Pressure on the weaker countries of the 17-nation eurozone was increasedwhen the
European Central Bank raised interest rates for the first time in almost three years. The ECB had put pressure on a reluctant Portugal to drop its hardline opposition to a bailout amid concerns that Portuguese banks were becoming too reliant on ECB funding. "We have encouraged the Portuguese authorities to ask for support," said Jean-Claude Trichet, president of the ECB.
Spain ruled out the possibility that it would be the next to buckle. Finance minister Elena Salgado said Spain's economy "is more diversified, more powerful with sound basics, and is much more competitive" than Portugal's.
The Organisation for Economic Co-operation and Development backed Spain's chances of avoiding a bailout: "Spain will not have the same problems as Portugal has been facing because it has been addressing those problems for quite some time," said Angel Gurría, the secretary general of the Paris-based thinktank.
In the UK, the Bank of England left borrowing costs on hold at 0.5% as Osborne used a keynote speech to the British Chambers of Commerce to spell out the government's case for deficit reduction.
"If you hear the stories about the cuts and still wonder why our country needs to take these difficult decisions, then look at what is happening around us. First Greece, then Ireland, today Portugal," he said.
"All of them countries that did not convince the world they could pay their debts. Two of them countries with smaller budget deficits than Britain. Now all of them being bailed out, at huge costs to their populations.
"Today of all days we can see the risks that would face Britain, if we were not dealing with our debts and paying off our national credit card. These risks are not imaginary – they are very, very real. Those in our country who deny the urgent need to deal with our deficit are playing Russian roulette with Britain's national sovereignty."
Balls, speaking to Sky News, said: "I think this is a desperate piece of scaremongering from what is an increasingly desperate chancellor who looks out of his depth. If anybody is playing Russian roulette with the British economy, it is George Osborne taking a huge gamble now without any idea how it's going to turn out. That may be good political lines but it is very bad economics. And it's taking huge risks with jobs and businesses and family finances up and down the country. I think he has got this very, very badly wrong and he will rue this day with this blatant politicking."
Attempts to resolve Portugal's crisis speedily were being hindered by Lisbon's political vacuum and over whether a caretaker government had sufficient authority to negotiate bailout terms that are likely to prove unpopular. The European commission and the ECB are expected to dispatch experts to Lisbon as early as next week to pore over the details.
Anders Borg, Sweden's finance minister, condemned Portugal's delay in asking for help. "We have reason to direct sharp criticism against the Portuguese. They have placed themselves and
Europe in a very difficult situation," he complained. "They should have requested aid much earlier."
Portugal last month became the second country in a few months to suffer a government collapse because of the
European debt crisis.
But unlike Ireland, and previously Greece, the negotiations with Lisbon involve a lame duck prime minister, José Socrates, who lacks the electoral legitimacy to impose the kind of austerity and spending cuts that the eurozone will demand as the price of rescue.
It is assumed that Socrates will have to strike a deal with the main opposition centre-right Social Democrats in order to secure a negotiating mandate. The collapse of his government last month means that Portugal has been thrust into an early election, with the ballot on 5 June.
By then it needs to raise around €10bn, meaning that EU funds would need to be disbursed before the election. EU governments are eager to avoid a repeat of the Irish scenario, where the government negotiated the bailout deal, then lost an election and its successor sought to unpick the terms.
Amid speculation about a "bridging loan" to tide Portugal over until the elections, Brussels and Berlin stressed that, legally, the sole instruments available were the two temporary vehicles created last May, the European Financial Stability Mechanism and the European Financial Stability Facility – the first totalling €60bn administered by the commission (with Britain liable for 13.7%) and the second comprising €440bn in eurozone government loan guarantees. Access to those funds requires "strict conditionality".
It is also highly probable that the International Monetary Fund, at German insistence, will need to be involved, whether Socrates wants it or not.
The bail-out deal is likely to include major cost-cutting
