Portugal Crisis Deepens, Debt Costs Surge

Two more Portuguese ministers from the junior ruling coalition party were ready to resign on Wednesday, local media said, deepening turmoil that could trigger a snap election and derail Lisbon's exit from an EU/IMF bailout.

Multiple newspaper radio and television reports said Agriculture Minister Assuncao Cristas and Social Security Minister Pedro Mota Soares will follow their CDS-PP party leader Paulo Portas who tendered his resignation on Tuesday. Party officials were not available to comment as the party's executive commission was in a meeting.

Prime Minister Pedro Passos Coelho told the nation late on Tuesday that he did not accept Portas' resignation and would continue to head the government to ensure political stability and work to overcome the stalemate. Many commentators called the situation "absurd".

With no solution imminent, Portugal's bond and stock prices slumped further. The returns investors demand to hold 10-year bonds surged to above 8.1 percent for the first time since November and the PSI 20 stock index slumped 6 percent, led by sharp losses of over 10 percent in banks' shares.

Coelho's decision to reject his foreign minister's resignation puts the responsibility for the government's survival squarely on the shoulders of Portas, who now has to decide whether to stay in his post or pull his rightist CDS-PP party out of the coalition. Without the CDS-PP, the centre-right government would lose its majority.

"One thing is certain, the prime minister is going to do everything to stay on, giving all possible concessions to Portas," said political scientist Antonio Costa Pinto. "Failing that, however, we can hardly avoid an early election."

Portugal is subject to strict budget conditions imposed by a European Union/International Monetary Fund bailout. It had been hoping to return to normal debt markets but rows over continued austerity have now thrown this into question.

"We see early elections as the most likely outcome at this stage, even if we cannot fully rule out support from some CDS MPs and the continuation of the government," Barclays' economist Antonio Garcia Pascual said in a note.

"We consider that the decision of the CDS leader to step down from the government can be explained to a large extent by the fall in popular support for the government coalition."

A day before Portas tendered his resignation, Finance Minister Vitor Gaspar, the architect of spending cuts and tax hikes required by lenders as a condition of their support, stepped down citing an erosion in support for the bailout.

Costa Pinto also said counting on occasional support from CDS-PP in parliament would allow the government to muddle through, but not for long.

Although President Anibal Cavaco Silva is expected to promote a grand coalition government, analysts do not expect the largest opposition party, the moderate centre-left Socialists who lead in opinion polls, to play ball.

Still, while opinion polls indicate Socialists will win a snap election, they would fall short of a majority, which would also require CDS support. The only two remaining parties in parliament, the Communists and the Left Bloc have never entered any coalition and are unlikely to do so, analysts say.

"So, it's all in Portas' hands," Costa Pinto said.

Barclays' said a Socialist victory should not represent a radical change in the course of the bailout programme. It also said that even if there are delays in upcoming bailout reviews and disbursements, Portugal has enough funds to meet bond repayments this year.