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Portuguese Prime Minister Jose Socrates resigned on Wednesday after parliament rejected his government's latest austerity measures, designed to help Portugal avoid having to seek an international bailout.
IS A BAILOUT INEVITABLE?
It looks likely. At around 7.8%, Portugal's 10-year government bond yield is well above the 7% level which many analysts think is unsustainable in the long term. The five-year yield is even higher; similar inversions in the yield curve were seen for Greece and Ireland before they sought bailouts last year.
After the rejection of the austerity measures, Portuguese yields could rise further unless a new government quickly comes up with a fresh austerity package — but forming a new government could take many weeks.
Socrates and his Socialists firmly opposed a bailout, which would carry tough fiscal conditions; Portugal has bad memories of IMF-ordered austerity in the 1980s. But the main opposition Social Democrats (PSD) have not ruled out seeking international aid. PSD leader Pedro Passos Coelho has indicated he would seek political cover for any bailout by blaming the last government for it. Other, smaller parties are mostly against a bailout.
Rich euro zone states such as Germany have been pressing Portugal to seriously consider a bailout, as a way of removing a major source of market instability in the euro zone. They could increase their pressure if Portuguese yields keep rising.
"The prospect of a bailout has risen drastically and is now enormous," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto.
WHEN WOULD A BAILOUT OCCUR?
Portugal has 4.3 bln euros of bonds coming due on April 15, and a further 4.9 bln euros in June; the weeks before these redemptions would be logical times to take a bailout.
But if Portugal retains access to the debt market to refinance those bonds, and is willing to accept very high yields, it may be able to avoid taking a bailout for many more months; after June, it will face no more bond redemptions this year.
A delay in forming a new government would not necessarily delay a bailout, some political analysts said.
"Although a caretaker government cannot take major autonomous initiatives, it could take a decision on resorting to aid if it is backed by parliament," said analyst Antonio Costa Pinto.
HOW LARGE WOULD A BAILOUT BE?
An official euro zone source estimated in January that were Portugal to ask for international aid, it might need between 60 and 80 bln euros.
Together, the euro zone's bailout fund, the European Financial Stability Facility, and the International Monetary Fund could provide those amounts comfortably — even if a planned expansion of the EFSF is held up by wrangling among European governments.
WHEN WILL PORTUGAL HAVE A NEW GOVERNMENT?
Socrates presented his resignation to President Anibal Cavaco da Silva, who said he would hold meetings with all political parties on Friday and that the government would retain full powers at least until then.
Cavaco Silva could ask the parties to agree on a new prime minister and a coalition government without calling an election, but a consensus on this is unlikely to be reached as Socrates and Passos Coelho have indicated a general election would be the most legitimate solution to the stand-off.
So Cavaco Silva will probably ask the state advisory council and the heads of the parties to discuss dissolving parliament and calling snap elections. These can be held 55 days after they are called, at the earliest.
In the meantime, the government would stay on as a caretaker administration, its functions reduced to strictly necessary management of public matters.
HOW WOULD ELECTIONS PAN OUT?
The PSD has been ahead in opinion polls for several months with around 35-38% of voting intentions, but it has rarely neared the threshold needed to win an absolute majority.
Analysts say the Socialist election machine should not be underestimated. Socrates, an experienced and fierce campaigner, has said he would stand in a new election. His party still has around 25-30% of voting intentions in recent polls and could still thwart the PSD.
If it won, the PSD could try to revive a coalition with the CDS-PP to have a stable majority to pass legislation; it has signalled it would favour a broad coalition.
In the current parliament, the Socialists have 97 seats, 19 short of the number needed to approve legislation on their own. The PSD has 81 seats, followed by CDS-PP's 21. The Left Bloc has 16 seats and the Communist-Greens alliance holds 15.
HOW DOES THE PSD DIFFER FROM THE SOCIALISTS?
The centre-right PSD denounced Socrates' latest austerity measures as arbitrary, poorly thought out and too harsh towards pensioners, but it supports the idea of cutting the budget deficit and may simply have used the controversy over the latest measures to force a crisis that could give it power. The PSD has said it will stick to Portugal's commitments to the EU, made by the Socialist government, to cut the deficit to 2.0% of GDP in 2013 from a projected 4.6% this year.
Some analysts believe the PSD could ultimately prove more aggressive in reforming Portugal's public finances than the Socialists.
