Portugal’s borrowing costs rose to a seven-month high as political tensions grow over the country’s bailout terms. Yields on 10-year bonds hit an intraday high of 7.9% before easing back, while the Lisbon stock market closed down by 1.6%.

Portugal

Portugal Descends into Political Crisis

The country has descended into political crisis over the implementation of austerity measures designed by troika creditors at the EU, IMF, and ECB.

This morning, it’s been reported that the opposition is calling for a re-negotiation of the terms of Portugal’s bailout package. Last week, Portuguese finance minister Vitor Gaspar resigned over the austerity program.

“Mr. Gaspar’s resignation on July 1 has opened a Pandora’s box,” says Nicholas Spiro, managing director of Spiro Sovereign Strategy. “Portuguese politicians from the President down are treating the exit of Mr. Gaspar, the architect of the fiscal and structural reforms demanded by the troika, as a green light for a public debate about the bail-out programme.  Yet the manner in which this debate is taking place, with the President undermining the prime minister and the opposition leader seeking to renegotiate the terms of the programme, is spooking markets.”

Cumulative Borrowing from the Eurozone Central Bank Rose

Data published by the Bank of Portugal late on Tuesday showed that cumulative borrowing from the Eurozone central bank rose from 48.75 billion euros ($62 billion) at the end of May, representing a reversal from a 2 percent drop in the previous month.

Lisbon’s efforts to repair its public finances and gain full access to debt markets as it targets an exit by mid-2014 from its 78-billion euro EU-IMF aid programme have been threatened by a internal rift in the country’s ruling coalition. Critics of the government say the terms of the rescue have caused the biggest economic slump since the 1970s and sent unemployment to record levels of around 18%.

Portuguese Banks Frozen Out of International Markets Again

The crisis, which broke out last week with two ministers’ resignations, is set to freeze Portuguese banks out of international markets again and rattles their chances of recovery, analysts and traders say.

An extended drop in Portuguese banks’ dependence on ECB funding since a peak of 60.1 billion euros in June 2012 reflects greater liquidity in the Portuguese banking system, said Andre Rodrigues, an analyst at Caixa BI.

He warned, however, that the borrowing still represents around 10 percent of banks’ total assets and nearly 30 percent of Portugal’s gross domestic product.

“It remains our opinion that it is too early to think that the banks will reduce, in a significant way, their exposure to ECB funds in the short term,” Rodrigues said in a research note.

Investors fear disagreements over the bailout will weaken Portugal’s commitment to economic reform.