The uncertainty over the future of the Portuguese government creates a new flashpoint in the austerity strategy that's been pursued by the 17-country eurozone to deal with its debt crisis.
With the centre-right government looking to be on the verge of collapse and facing mounting pressure from opposition parties, Pedro Passos Coelho made a televised evening address to the nation to say he would seek to heal the rift between the two coalition partners and examine the reasons for the surprise resignation of Foreign Minister Paulo Portas earlier in the day.
Portas, leader of the junior coalition partner, quit a day after Finance Minister Vitor Gaspar also walked out.
Gaspar, a non-political economist specially selected by Passos Coelho to push the austerity drive, said he lacked the political and public support for his ongoing program of cutting public sector pay and pensions and raising taxes.
Portas, the leader of the Popular Party who has demanded greater emphasis on growth measures, said he could not accept Gaspar's replacement, former Secretary of State for the Treasury Maria Luis Albuquerque.
She has endorsed the austerity approach that the country, one of the 17 European Union countries that use the euro, has pursued since its 78 billion euros international bailout ($102 billion) in 2011 after a decade of weak growth and mounting debt pushed it to the verge of bankruptcy.
Passos Coelho, who is leader of the senior coalition member, the Social Democratic Party, said he wouldn't be rushed into accepting Portas's resignation because "the threat of political instability brings risks for the country nobody wants and could be grave."
"Let me be clear," Passos Coelho said, "I won't resign, I won't give up on my country."
The Social Democrats have just 108 seats in the 230-seat Parliament, meaning that without its Popular Party partner's 24 seats it wouldn't have the majority it needs to push through its policies.
Though Portas did not say whether his party would pull its support from the government, the resignations pitched what for two years had been a stable administration into disarray within the space of 24 hours. It recalled the political strife that has dogged Greece's efforts to recover from its own bailout — last month, a junior partner quit Greece's government, leaving the remaining two coalition partners with a slender majority in parliament.
For over three years now, the austerity demanded by creditors has met with growing resistance from politicians, trade unions and business leaders. Austerity has been widely blamed for driving the jobless rate in Portugal to 17.6 per cent and for what is forecast to be a third straight year of recession in 2013.
Investors have watched developments in Portugal with concern — the interest rate Portugal pays on its debt has spiked sharply amid fears that the resignations could lead to the government falling apart and making it harder for the country to pay what it owes.
The yield on Portugal's 10-year bonds — a benchmark of investor faith in the country — has climbed to 6.42 per cent. Over the past year of political stability, those rates had fallen to a low point of 5.23 per cent in May.
Amid the growing tensions in financial markets, opposition parties demanded elections for a new government. Antonio Seguro, leader of the main opposition Socialist Party, called for the government to stand down.
"The government is falling apart and we need a new one," he said.
The Socialists were the party in power at the time of the bailout and agreed to a deficit-reducing program demanded by the International Monetary Fund and other EU countries. If Portugal doesn't abide by the terms of the bailout agreement, the creditors can halt disbursements of the rescue loans.
Portugal's government debt stands at almost 124 per cent of its annual gross domestic product. That's the third-highest in the EU after Greece and Italy. Its deficit last year was 6.4 per cent of annual GDP— above the 5 per cent target but below the 2010 figure of 10.1 per cent.
Portas had repeatedly spoken out against former finance minister Gaspar's strategy. But Gaspar had the support of Passos Coelho and of the European officials who monitor the bailout agreement, as does his replacement.Suggest a correction