Portuguese bonds and stocks fell heavily in early trading
Wednesday after the resignation of Foreign Minister Paulo Portas,
the leader of the junior party in the governing coalition,
triggering the worst political crisis since Portugal accepted an
international bailout two years ago.
Portuguese bonds were already on a weaker footing before Mr,
Portas' resignation; they had dipped Tuesday after the surprise
resignation of Finance Minister Vitor Gaspar. Wednesday, the
selloff accelerated sharply.
Portuguese 10-year bond yields shot above 7%, widely seen as an
unsustainably high level, amid fears Mr. Portas's Democratic and
Social Center Party will withdraw its support for the government.
Yields pushed higher in other peripheral euro-zone countries as
fears of contagion grew. Bond yields rise as prices drop.
"The political problems increase the uncertainty surrounding
Portugal's bailout commitments and potentially even the prospect
for negotiations of a precautionary program succeeding the current
program running out in May next year," RBC said in a note to
clients. "We see the risk of further spillover effects into Spanish
bonds and Italian bonds hampering the recent recovery."
Ten-year Portuguese yields rose more than a percentage point to
7.525%. Yields on Italian 10-year bonds rose by 0.19 percentage
point to 4.589%, while Greek bonds were quoted up 0.15 percentage
point at 11.065% according to Tradeweb.
Portugal's benchmark equity index, the PSI-20, slumped by over
6% at the open. This has also weighed on the core European markets,
with Germany's DAX index down 1.5%, the CAC-40 in France off 1.4%,
and in the U.K. the FTSE 100 index 1.1% lower.
Portugal's banking stocks have been especially hard hit, with
Banco Espirito Santo SA (BES.LB) dropping 7.7%, Banco Comercial
Portugues SA (BCP.LB) down almost 13%, and Banco BPI SA (BPI.LB)
slumping 9%.
Mr. Portas leads the conservative Democratic and Social Center
Party, which the government relies on for its majority. It isn't
clear whether his party will withdraw its support for the
center-right coalition government.
He stood down a day after Finance Minister Vitor Gaspar, the
architect of the country's austerity plan under its EU-IMF bailout,
also quit, triggering calls for an early election.
In his resignation letter, Portas said he disapproved of the
prime minister's appointment of Treasury Secretary Maria Luis
Albuquerque to replace Gaspar, highlighting divisions in cabinet
about the future of the government's austerity plan.
Like Mr. Gaspar, Ms. Albuquerque has emphasized a need for the
government to keep tight control over its budget. Her appointment
was considered unlikely to lead to a strong shift in policy.
Prime Minister Passos Coelho said late Tuesday in a televised
address that he hadn't accepted the resignation, citing the likely
political instability. "I won't resign and won't abandon my
country," he said.
Compared with Greece, another country pushing through unpopular
cost-cutting measures, Portugal's government was previously united
behind austerity measures. In recent months a series of strikes and
street protests in Portugal have tested the limits of the public's
tolerance for cost-cutting.
(Patricia Kowsmann and Peter Nurse contributed to this
article.)
Write to Ed Ballard at ed.ballard@dowjones.com