Portugal's prime minister resigned Wednesday after opposition parties rejected his austerity plan to reduce the country's mounting debt. The resignation ends the socialist government's six-year reign. It also makes it more likely that Portugal will soon follow Greece and Ireland as the next European Union country to ask for a bailout.
Portugal's financial collapse now appears more likely following Prime Minister Jose Socrates abrupt resignation this week. "The opposition took away the government's ability to continue running the country. Consequently, I have presented to the president of the republic my resignation from the post of Prime Minister," Socrates said.
Markets took the resignation as a sign that debt-heavy Portugal has given up its year-long battle to avoid a bailout.
The announcement pushed interest rates on the government's 10-year bonds to a record high - making it more likely that Portugal will ask for emergency rescue funds just as Greece and Ireland did last year.
In Brussels, where anti-austerity protests have begun, the new crisis threatens to overshadow an EU summit meant to reassure markets that the euro is sound.
"There is another EU summit today [Thursday] at which the bail [out] package is due to be raised, so these new developments will influence that. We can definitely see an influence on the Euro which dropped two cents overnight," said Market expert Fidel Helmer.
Analysts estimate the cost of the Portugal bailout at 80 billion euro, or about $113 billion. Angus Campbell at London Capital Group says investors are waiting for concrete action from Brussels. "The difficulty for the euro at the moment is of course getting coordinated agreement and more than anything else, getting support from Germany which is of course the power house of Europe," Campbell said.
German Chancellor Angela Merkel expressed disappointment. She was critical of the country's politicians for not being able to reach a compromise.
"It is about the future of the euro, it is financial stability and whether a country and its prime minister, whether a Social Democratic or Christian Democratic, shows responsibility. And it is regrettable that parliament did not support the reforms," Merkel said.
Portugal's outgoing leader says the country has enough cash reserves to meet a $6.4 billion debt repayment next month. But analysts say a smiliar payment in June is doubtful.
Portugal is one of the smallest economies in the 17-nation eurozone, but its financial collapse could trigger fresh worries about other debt-heavy euro countries such as Spain, Belgium and Italy.