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Portugal government on brink, markets take fright

Published on 03/07/2013

Portugal's government tottered close to collapse on Wednesday after two ministers quit over its bailout reforms, sparking cries of concern from European authorities as financial markets took fright.

Stock markets fell and bond yields rose as the crisis fed fears of a new wave of instability from the eurozone’s debt-laden periphery.

Alarm spread after Foreign Minister Paulo Portas resigned on Tuesday evening, a day after the shock departure of Finance Minister Vitor Gaspar.

Portuguese newspapers reported on Wednesday that the agriculture and social security ministers were also likely to quit.

The crisis came at a delicate time as Prime Minister Pedro Passo Coelho tries to fulfil the terms of the 2011 bailout that rescued Portugal from financial collapse.

Passos Coelho kept up appearances on Wednesday, travelling to Berlin as scheduled for a top-level meeting on youth unemployment.

But European officials urged the premier to settle the uncertainty as observers speculated that President Anibal Cavaco Silva would call a snap election.

“The political situation should be clarified as soon as possible,” said the European Commission’s Portuguese president, Jose Manuel Barroso.

Lisbon’s key PSI 20 index of leading shares closed 5.31 percent lower, with leading exchanges elsewhere in Europe sliding too.

Portuguese borrowing prices soared with the yield on the benchmark 10-year government bonds spiking above eight percent for the first time since November 2012, before easing a little.

“The initial reaction of the markets shows the obvious risk that the financial credibility recently built up by Portugal could be jeopardised by the current political instability,” said Barroso.

“If this happens it would be especially damaging for the Portuguese people, particularly as there were already preliminary signs of economic recovery.”

In a bid to hold together his conservative coalition, Passos Coelho on Tuesday refused to accept Portas’s resignation and vowed not to resign himself.

Speaking after Wednesday’s meeting in Berlin he said he had expressed to his fellow leaders his “confidence that we in Portugal will be able to overcome these difficulties”.

He said German Chancellor Angela Merkel and the other leaders expressed their “apprehension” over the crisis but gave him “words of encouragement”.

Analysts warned that the political disarray could bring down his government and derail the country’s recovery under the 78-billion-euro ($100-billion) international bailout.

“Portugal, under severe economic pressure from a lack of growth, a bloated public sector and more than a decade of non-growth, most likely will see its government fall inside the next 48 hours,” Saxo Bank chief economist Steen Jakobsen said on Wednesday morning.

In his resignation letter, Portas said he disapproved of the prime minister’s naming of Treasury Secretary Maria Luis Albuquerque to replace Gaspar. Her appointment was seen as an indication that Passos Coelho intended to push on with austerity despite protests.

Drastic cuts in spending and tax rises have plunged the country into a deeper recession with higher unemployment than had been expected.

Passos Coelho’s government has just two weeks to come up with a new programme to reform the state before auditors for the IMF, European Union and European Central Bank arrive on July 15.

President Cavaco Silva was to meet with the prime minister and lawmakers on Thursday in a bid to settle the crisis, his office said.

“The situation is worrying. So I’m calling on Portugal to take responsibility,” said Jeroen Dijsselbloem, the Dutch minister who heads the Eurogroup of eurozone finance chiefs.

Analysts warned that if the market tension continued, the country might not be able to return to normal borrowing on the markets next year as hoped.

“The most probable scenario seems to me to be snap elections,” said financial analyst Paula Goncalves.

“The chances of a second bailout are increasing.”