Portugal in crisis talks as markets fall

Portugal’s president summoned the main political parties for crisis talks over the government’s future, with markets reeling on fears that a snap election could derail Lisbon’s exit from an international bailout.

President Anibal Cavaco Silva’s office said he would meet the leader of the main opposition Socialists, the premier and other parties after that. Under the constitution, he has the power to dissolve parliament and can act to mediate in political crises.

His decision came after several reports said two more ministers from the junior ruling coalition party were ready to quit and follow their CDS-PP party leader Paulo Portas who tendered his resignation as foreign minister on Tuesday.

A day earlier, 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.

Portas resigned because he objected to the appointment of treasury secretary Maria Luis Albuquerque to replace Gaspar. He must now decide whether to pull his party out of the coalition, thereby robbing it of its majority.

European Commission president Jose Manuel Barroso, a former Portuguese premier, said Portugal risked damaging its hard-earned financial credibility after two years of closely following its bailout programme.

“This delicate situation requires a great sense of responsibility from all political forces and leaders,” he said.

Prime Minister Pedro Passos Coelho said he did not accept Portas’s 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. The returns investors demand to hold 10-year bonds surged to above 8.1% for the first time since November and the PSI 20 stock index tanked by 6%.

The crisis hit shortly before inspectors from Lisbon’s creditors — the EU and IMF — arrive to start their next review of the economy on July 15. That might now be delayed.

Bank of America Merrill Lynch analysts said the combination of surging yields and political uncertainty “reduces the prospects of Portugal regaining full market access in the next year”, leading to expectations of a new bailout being required.

That, in turn, could send Portuguese bond yields even higher as a second bailout could involve Greece-style losses forced upon debt holders, the analysts said.

— Reuters