• Government's fall puts EU bailout fund pact in jeopardy
• Lame-duck leader Sócrates will see bankruptcy within weeks
European leaders have begun a two-day summit in Brussels in what is being billed as the definitive attempt to ring-fence the fragile eurozone against market attack and the insolvency of weaker members.
But the summit, intended to establish a permanent €700bn (£600bn) bailout fund for the single currency area, has been overshadowed by the collapse of the government in Portugal, with the country teetering on the brink of bankruptcy and likely to become the third eurozone country in six months to ask for a bailout.
Portugal's situation worsened when the Fitch rating agency downgraded the country's sovereign debt by two notches, to A- from A+, a move likely to increase its already record borrowing costs.
The aim of the third EU summit in as many months is to put the euro's travails behind it by sealing a "comprehensive package" of economic and fiscal reforms, penalties and pacts that should bring greater coherence and convergence in the policymaking of the 17 disparate countries of the eurozone.
Instead, the moment of clarity has turned to one of confusion, with the downfall of the government in Lisbon throwing up legal and constitutional dilemmas.
The cost of Portuguese borrowing rose to a record level of 7.7% on the bond markets – unaffordable for the minority government of José Sócrates, which fell when the opposition failed to support his fourth austerity package in a year.
There is unlikely to be any immediate fix for the Portuguese conundrum. Sócrates has been resisting EU pressure to ask for a bailout for some time. But the exorbitant cost of borrowing may leave Lisbon broke within weeks. As a lame-duck prime minister, it is not clear whether Sócrates has the authority to do a U-turn and ask for Portugal to be rescued.
The summit is also dogged by other tensions. Ireland's hopes that the new taoiseach, Enda Kenny, could deliver a cut in the punitive rates levied on Ireland's €85bn bailout, are looking misplaced. "My expectation of a settlement of the Irish issue by the end of this week is slight," said one senior German official.
EU finance ministers are worried that there could be a fresh banking emergency in Ireland within weeks, with stress tests revealing that the €35bn earmarked in the bailout for banks' recapitalisation proving woefully short of requirements. "It's very likely that it's not enough," said a senior EU diplomat. "The worst case scenario is that we agree a comprehensive response, save the euro, and a week later."
Chancellor Angela Merkel of Germany riled her fellow leaders – not for the first time in the course of the year-long European debt crisis – by announcing she wanted to renegotiate the terms of Berlin's payments into the new permanent bailout facility being established from 2013.
The European stability mechanism amounts to €700bn, with €500bn available for salvaging insolvent states, and €80bn of the total to be paid in by member governments in instalments.
Finance ministers agreed on Monday on the timings and amounts of contributions. But Merkel told the Bundestag in Berlin today that she wanted the agreement changed, and that Germany would pay its €22bn share over five, rather than four, years from 2013.
A further problem concerns the current temporary bailout fund of €440bn, which is only able to lend €250bn while retaining its triple-A credit rating. Eurozone governments were to have guaranteed more funds to make the full €440bn available for bailouts, but that decision has been put off for several months.