Portugal's economy in crisis as two ministers resign from coalition government

The junior People's Party prompts political and economic crisis over austerity split

The resignation of two key ministers in Portugal’s coalition government drove the country to the edge of an economic and political crisis yesterday, prompting its president to hold crisis talks.

Stocks in Lisbon plummeted 5.2 per cent and the cost of borrowing rose dramatically after Paulo Portas, the leader of the coalition’s junior People’s Party, resigned over the appointment of a new pro-austerity finance minister. He follows Finance Minister Vitor Gaspar, who quit on Monday.

The split over the country's economic policy, which also saw the interest rates on Portugal’s ten year bonds jump to nearly eight per cent, had knock-on effects for the eurozone.

Italian and Spanish debt was rapidly sold off and the FTSE 100 index fell 1.2 per cent, costing shareholders a collective £19bn. The Portuguese stock market, PS120, which has been slowly recovering from the 2011 crisis, fell by more than five per cent.

The markets were slowly rebounding this morning, with the FTSE 100 rising 0.9 per cent after investors signalled for the European Central Bank (ECB) to settle concerns left over from yesterday's turmoil.

"I am expecting some healing words from [ECB President Mario] Draghi, which should calm fears over the situations in Portugal and Greece because it is a very psychologically driven market," Rolf Bland, chief investment officer at VZ Vermogenszentrum in Zurich, said.

"I don't think any new stimulus measures will be on the table, but it is a question of words and making clear once again that everything will be done [to save the euro] and interest rates and policy will remain accommodative, which will be very helpful at this moment."

In an attempt to stay the impending collapse, President Anibal Cavaco Silva met with party leaders for emergency talks, after which the People’s Party reassured Europe there would be no further high profile resignations.

Speaking in Berlin, Prime Minsiter Pedro Passos Coelho added: “I am confident that we will be able to surpass this difficulty. I hope this internal crisis can be overcome very quickly.”

Earlier, the People's Party, which holds 24 seats in Portugal’s 230-seat parliament and therefore secures the government majority, met to decide whether it would continue to support the coalition.

According to local media reports, the smaller party had not taken a final decision last night, but were prepared to 'renegotiate' their relationship with the Social Democratic party, which holds 108 seats. The two groups are expected to hold meetings today.

"The Portuguese government is on the rocks," Raoul Ruparel, head of economic research at Open Europe, told The Daily Telegraph. "Although Portugal has financing in place until the end of the year, it is still subject to stringent reviews. This suggests political turmoil could cause serious problems when it comes to releasing this financing which Portugal desperately needs over the summer."