Portugal facing snap elections as parties clash over austerity
KEY political parties failed to agree on a national salvation front in Portugal, raising the risk of a snap election and an anti-austerity revolt.
As a result of the political breakdown, borrowing costs have spiked dramatically and yields on 10-year Portuguese bonds jumped more than 100 basis points to 7.85pc.
The turmoil yesterday was sparked by a government request to delay the next review of the country's EU-IMF troika bailout until August.
President Anibal Cavaco Silva set off a constitutional crisis on Thursday when he vetoed a reshuffle by the two conservative coalition parties, insisting on a unity government to see through austerity cuts until mid-2014.
Socialist leader Antonio Jose Seguro has so far refused to take part, demanding fresh elections to clear the air. "We must abandon the politics of austerity, and renegotiate the terms of our adjustment programme.
"The prime minister must accept that his austerity policies have failed," he said.
Some Socialist leaders have threatened debt repudiation as a way of fighting back at Germany and the creditor powers, though that is not the party position.
Standard & Poor's downgraded Banco Comercial, and placed a string of banks on negative watch. The agency appeared to endorse warnings that austerity overkill was making matters worse, saying continued fiscal cuts were "eroding the resilience of the private sector".
Ricardo Santos from BNP Paribas said it was unclear whether Portugal could withstand a further €5bn of cuts ordered by the troika.
"The country is near the tipping point," he said.
"Everybody has been saying that Portugal is so different from Greece but if this political crisis goes on for long, that won't be so clear any more."
President Cavaco Silva has limited powers to force a deal on recalcitrant parties, but experts say it is hard to see how the current government can soldier on after such a blow to its authority. He may have to resort to the "nuclear option" of snap elections, opening the way for a fragmented parliament.
The crisis was prompted by the exit of finance minister Vitor Gaspar, the chief architect of Portugal's crisis strategy, who stormed out complaining that he had been undercut by the junior CDS party in the coalition.
"Gaspar did make strenuous efforts to curb the budget deficit, but Portugal's debt ratio kept on rising. There has to be a risk of another macroeconomic calamity on the scale of Greece and Cyprus," said Tim Congdon from International Monetary Research.
Portugal has until now been held up as a poster-child of EMU austerity, praised for sticking to its bailout terms. Failure at this stage would be a grave indictment of EU strategy itself. It would also force the eurozone to clarify its own crisis policies, exposing deep rifts. ( © Daily Telegraph, London)