Portugal crisis sends markets down
Portugal's government is teetering on the brink of collapse, sending financial markets around Europe into a tailspin and reigniting concerns about the euro area's strategy for dealing with its prolonged financial crisis.
Prime minister Pedro Passos Coelho defied calls to resign but was running out of options to keep his centre-right coalition government together following the back-to-back resignations this week of two key ministers in a spat over austerity.
If the governing coalition collapses, the ruling party would not have enough votes in parliament to pursue the reforms required to keep accessing the international bailout loans it depends on to avoid bankruptcy. That would put Portugal back to the front and center of Europe's debt crisis, a spot it hasn't held since it was bailed out in 2011.
"Portugal is now the key event risk to watch in the eurozone," said Holger Schmieding, an analyst with German bank Berenberg.
Portugal agreed on the €78bn bailout programme with its fellow euro countries, the European Central Bank and the International Monetary Fund two years ago when it could no longer afford to pay its way on the international debt markets. In return for the loans, and to keep debt under control, Portugal had to agree to a series of harsh cuts and reforms.
The country also has to keep a grip on its finances so that it is able to return to the international debt markets once the current bailout loans run out in June 2014. If investors feel that Portugal is still a risky bet then and charge sky-high rates to buy the country's bonds, the government will be forced to ask for another bailout loan. Worse still, it could also be forced out of the eurozone.
Portugal's austerity programme has already proved a massive drag on the economy, eroded standards of living and drawn criticism from trade unions and business leaders.
The crisis in Portugal was sparked by the country's foreign minister, Paulo Portas, who is also the leader of the junior party in the coalition. He quit in protest against plans to continue with tax hikes and pay and pension cuts. The previous day, finance minister Vitor Gaspar walked out, saying he lacked political and public support for his austerity strategy.
Until recently Portugal had been making progress with its bailout programme. The government had successfully managed to participate in some small bond auctions and had won some breathing space on its deficit targets from its European partners. Also, the economic contraction was slowing and unemployment has stopped rising.
But the country still has a lot more unpopular cutting to do. The government has to find another €3.4bn of savings in 2014 and is due to present later this month details of a deep and broad reform of how the state is run. The proposal is expected to order a further streamlining of state services and will likely fuel more protests.