Portugal's president summoned 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 later on Wednesday, the premier on Thursday 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 media 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 program.
“This delicate situation requires a great sense of responsibility from all political forces and leaders,” he said.
Portugal's Prime Minister Pedro Passos Coelho addresses a news conference in Berlin, July 3, 2013.
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”.
Passos Coelho has fought tooth and nail to keep his country on a trajectory to exit its 78 billion euro ($102 billion) bailout next year as scheduled, but the measures have pushed Portugal deeper into its worst economic crisis since the 1970s.
The president has the power to dissolve parliament and call new elections but he has indicated that if political parties want to unseat the government they would have to put a motion of no-confidence through parliament.
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 percent for the first time since November and the PSI 20 stock index tanked by six percent, led by sharp losses of over 10 percent in bank shares.
The crisis hit shortly before inspectors from Lisbon's creditors - the European Union and International Monetary Fund - arrive to start their next review of the economy on July 15. That might well now be delayed.
Agriculture Minister Assuncao Cristas and Social Security Minister Pedro Mota Soares are likely to be the next to leave the center-right coalition government. Party officials were not available to comment as the CDS-PP executive commission was in a meeting.
The responsibility for the government's survival is now squarely on the shoulders of Portas.
“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 an EU/IMF bailout. It had been hoping to return to normal debt market funding but rows over continued austerity have now thrown this into doubt.
“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.
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.
The president is expected to promote a grand coalition government, analysts do not expect the largest opposition party, the moderate center-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.