Crisis in Portugal sparks euro panic

Prime minister Pedro Passos Coelho defied calls to resign but was running out of options to keep his centre-right coalition government together following the back-to-back resignations this week of two key ministers in a spat over austerity.

If the governing coalition collapses, the ruling party would not have enough votes in parliament to pursue the reforms required to keep accessing the international bailout loans it depends on to avoid bankruptcy. That would put Portugal back to the centre of Europe’s debt crisis, a spot it hasn’t held since it was bailed out in 2011.

“Portugal is now the key event risk to watch in the eurozone,” said Holger Schmieding, an analyst with German bank Berenberg.

Portugal agreed on the 78 billion euro bailout programme with its fellow euro countries, the European Central Bank and the International Monetary Fund two years ago when it could no longer afford to pay its way on the international debt markets. In return for the loans, and to keep debt under control, Portugal had to agree to a series of harsh cuts and reforms.

The country also has to keep a grip on its finances so it is able to return to the international debt markets once bailout loans run out in June 2014.

If investors feel Portugal is still a risky bet then and charge sky-high rates to buy the country’s bonds, the government will be forced to ask for another bailout loan.