Political Turmoil in Portugal Threatens To Exacerbate Eurozone Crisis

Political Turmoil in Portugal Threatens To Exacerbate Eurozone Crisis

The current political turmoil in Portugal may worsen the debt crisis in Europe. After adhering to the austerity program for almost a year, the Portugal government is facing a fresh crisis as finance minister Vitor Gaspar and foreign minister Paulo Portas have resigned.

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Political Turmoil in Portugal Threatens To Exacerbate Eurozone Crisis

After the resignation of two senior ministers of the coalition party CDS-PP, the other ministers from the party are expected to resign today, Citigroup Inc (NYSE:C) said in a research note. The outgoing ministers said they resigned because of the fading public support for Portugal’s austerity program.

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Portuguese Government May Collapse

Meanwhile, the opposition has stepped up calls for an early election and a renegotiation of the bailout program. Withdrawal of CDS-PP from the coalition would leave the Pedro Passos Coehlo-led government without a parliamentary majority. Citi economists fear that the chances of new elections have increased.

A new election would prolong the country’s dependence on bailout money and delay economic reforms, says Mark Thompson of CNNMoney. Portugal received a 78 billion euros bailout fund from the troika in 2011, and was planning to exit the austerity program in mid-2014.

Deutsche Bank economist Gilles Moec said that now we have to see whether CDS-PP entirely withdraws from the coalition. That will force immediate elections. It indicates that the prime minister’s position is very fragile. Deutsche Bank believes that the relationship between Portugal and the troika of lenders (ECB, IMF and European Commission) is going to sour.

Prime minister Pedro Passos Coelho said he has refused to accept the resignation of the foreign minister. Coelho tried his best to assure markets that he would remain in his position and do everything he can to establish a stable government. But worried investors aggressively sold stocks and bonds Wednesday amid fears that the government may collapse.

Portugal Pays Heavy Price

Portugal’s 10-year bond yields rose from 6.42 percent before the resignation of foreign minister to 8.02 percent today. The country’s stock index plunged 7 percent on Wednesday, with banks witnessing the biggest decline. Portuguese economy has paid a heavy price for the austerity measures demanded in return of the bailout funds. The country’s GDP is expected to decline 2.3 percent this year. It will be the third consecutive year of recession for Portugal. Jobless rate has jumped to a record high of 18 percent.

The Portuguese government has struggled to meet the terms of the bailout. The country was allowed extra time to meet the EU budget deficit rules. Another backsliding by Portugal will give other troubled countries like Cyprus and Greece the chance to ask concessions from troika.

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