Cantillon: instability in Portugal spooks markets

A period of relative calm in the euro zone could be at end amid anxiety in markets over the prospect of a leftist government taking power in Portugal. Add doubt over the release of a new loan to Greece into the mix and things could soon get choppy again.

Portugal’s centre right premier Pedro Passos Coelho , an ally of Taoiseach Enda Kenny, won the most seats in an election a few weeks back but lost his parliamentary majority.

He may now be toppled after opposition socialists struck an unlikely deal with rival communists and other leftists to back a new “anti-austerity” administration.

Markets are displeased. Portugal’s sovereign borrowing costs rose to their highest level for four months and its stock market lost 4.1 per cent yesterday.

Banks were hardest hit, with major lenders losing between 9.5 per cent and 10.7 per cent of their value in a single day.

Socialist leader Antonio Costa, Passos Coelho’s putative successor, has promised the new alliance will respect Portugal’s European commitments.

But his new partners have made it clear that they reject key reforms imposed on Lisbon during its EU/IMF bailout programme. Indeed, the communists have said in the past that Portugal should prepare to exit the euro and the left bloc previously said it wants to restructure sovereign debt.

With line-by-line budget talks in prospect, the market is spooked. European shares promptly followed Lisbon’s lead.

Then there is Greece. In Brussels yesterday, euro zone finance ministers did not release a €2 billion loan for Athens because there’s still no agreement on financial and legislative reforms.

A deal could yet be done this week, but it all goes to show that the euro zone debt debacle remains a running sore.

After prolonged turmoil in Greece, traders reckoned the toast fell “butter-side up” after the Portuguese election. Not so, it now seems.

With Spain’s election still to come next month, the backdrop to the Irish election early in the new year could prove testy.