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Portuguese government totters, markets reel

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    Protesters gather at the Marques de Pombal Statue holding a banner reading "Out" during an anti-government protest in Lisbon, on July 2, 2013. Portuguese Prime Minister Pedro Passos Coelho's government is tottering close to collapse after two top ministers quit, pounding financial markets in Lisbon and across Europe. (AFP)

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    Portuguese Prime Minister Pedro Passos Coelho addresses the nation from the Sao Bento palace in Lisbon, on July 2, 2013. Coelho's government is tottering close to collapse after two top ministers quit, pounding financial markets in Lisbon and across Europe. (AFP)

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    Portugal Foreign Minister Paulo Portas gives a press conference in Caracas on May 20, 2013. Portas has resigned in a row over Lisbon's bailout reforms. Portuguese Prime Minister Pedro Passos Coelho's government is tottering close to collapse after two top ministers quit, pounding financial markets in Lisbon and across Europe. (AFP/File)

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    A man uses a megaphone during an anti-government protest in Lisbon, on July 2, 2013. Portuguese Prime Minister Pedro Passos Coelho's government is tottering close to collapse after two top ministers quit, pounding financial markets in Lisbon and across Europe. (AFP)

Portuguese Prime Minister Pedro Passos Coelho's government tottered close to collapse Wednesday after two top ministers quit, pounding financial markets in Lisbon and across Europe.

Markets reacted severely after Foreign Minister Paulo Portas resigned Tuesday evening, a day after the shock departure of Finance Minister Vitor Gaspar.

EU officials told Portugal to take its responsibilities and clarify the situation "as soon as possible".

The crisis in recession-wracked Portugal spread fears in world markets of a new wave of instability from the bailed-out nation on the eurozone's debt-laden periphery.

The yield on benchmark 10-year Portuguese government bonds spiked above eight percent for the first time since November 2012, hitting 8.023 percent before easing a little. It closed the previous day at 6.720 percent.

The sharp rise in the bond yield is a warning that the government may have to pay exorbitant rates if it wants to sell newly issued bonds to the financial markets.

The Lisbon stock exchange's key PSI-20 index plunged 6.55 percent to 5,168.20 points in morning trade.

As concern spread, Madrid's IBEX 35 index slumped 3.15 percent to 7,638.2, London's FTSE 100 fell 1.64 percent to 6,200.66 points, Frankfurt's DAX 30 slid 1.93 percent to 7,757.78 points and in Paris the CAC 40 tumbled 1.70 percent to 3,679.03.

The euro fell to $1.2923 -- hitting a low last recorded on May 29. That compared with $1.2978 late in New York on Tuesday.

Investors were unconvinced by the Portuguese premier's vow to stay on.

"Portugal, under severe economic pressure from a lack of growth, a bloated public sector and more than a decade on non-growth, most likely will see its government fall inside the next 48 hours, despite assurances from Prime Minister Pedro Passos Coelho that he will not resign," Saxo Bank chief economist Steen Jakobsen said.

"The coalition is falling, and falling soon," he said in a report.

Jakobsen said he expected a new election to be called with a huge drive against austerity measures.

"The big loser this morning is Portugal as a country. I see Portugal doing a second bailout inside the next six months as the reality of economic non-progress will ultimately weigh higher than the political ability to buy time," he said.

On Monday, the Portuguese finance minister, architect of the country's reforms under its European Union-IMF bailout, which has triggered calls for an early election, announced his departure.

The foreign minister declared his resignation the next day, saying he disagreed with the premier's choice of Treasury Secretary Maria Luis Albuquerque, who has managed the country's privatisation efforts, as the new finance minister.

The prime minister said in a televised address that he had not accepted his foreign minister's resignation and had no intention of leaving himself.

"I'm not resigning. I'm not abandoning the country," he said.

Portugal's newspapers were withering in their criticism, describing the political crisis as "pathetic", "absurd", and "unforgivable".

The government, which came to power in early elections in June 2011, is increasingly isolated. It faced a fourth general strike organised last week by trade unions.

Drastic cuts in spending and tax rises have plunged the country into a deeper recession, and with higher unemployment, than had been expected.

BofA Merrill Lynch Global Research said even if early elections were avoided, the risk of snap polls remain high amid strong opposition to the reforms being pushed by the government.

At the end of March the Portuguese budget deficit amounted to 10.6 percent of annual output. The target set by creditors, already relaxed twice, is for a deficit of 5.5 percent at the end of the year.

Passos Coelho's government has just two weeks to come up with a programme to reform the state before auditors arrive on July 15 to examine progress on reforms for the IMF, EU and European Central Bank.

The government has said it expects the economy to contract by 2.3 percent by the end of the year while the unemployment rate has soared to a record 18.2 percent.