Portuguese bonds and
stocks led heavy declines in European markets early Wednesday after Foreign
Minister Paulo Portas resigned, triggering the worst political, since Portugal
accepted an international bailout two years ago.
Portugal's
benchmark equity index, the PSI-20, slumped by 6.5% at the open, dragging the
main stock index of neighboring Spain, the IBEX, down 3.1%.
This has also
weighed on the core European markets, with Germany's DAX index down 1.8%, the
CAC-40 in France off 1.7%, and the U.K.'s FTSE 100 down 1.5%.
Portuguese bonds were already on a
weaker footing before the resignation; they had dipped Tuesday after the
surprise resignation of Finance Minister Vitor Gaspar. Wednesday, the selloff
accelerated sharply.
Portuguese
10-year bond yields rose more than a percentage point to 7.69% amid fears Mr.
Portas's Democratic and Social Center Party will withdraw its support for the
government. Yields pushed higher in other financially stressed euro-zone
countries as fears of contagion grew. Bond yields rise as prices drop.
"The
political problems increase the uncertainty surrounding Portugal's bailout
commitments and potentially even the prospect for negotiations of a precautionary
program succeeding the current program running out in May next year," RBC
said in a note to clients. "We see the risk of further spillover effects
into Spanish bonds and Italian bonds hampering the recent recovery."
More than 4 ½ hours before the
start of trading in the U.S., futures for the Dow Jones Industrial Average were
down 0.6% at 14774. Changes in futures don't always accurately predict early
market moves after the opening bell.
Mr. Portas leads the conservative
Democratic and Social Center Party, which the government relies on for its
majority. It isn't clear whether his party will withdraw its support for the
center-right coalition government.
He stood down a day after Mr. Gaspar,
the architect of the country's austerity plan under its international bailout,
also quit, triggering calls for an early election. The Socialist Party,
currently led by António José Seguro, has been ahead in recent opinion polls.
Mr. Seguro's party has broadly supported the government's cost-cutting goals,
but would likely seek to slow the pace of reform if they prosper in an early
election. The poll is due sometime before October 2015.
Yields on Italian 10-year bonds rose
by 0.11 percentage point to 4.507%, while Greek bonds were quoted up 0.11
percentage point at 11.183% according to Tradeweb
In his
resignation letter, Mr. Portas said he disapproved of the prime minister's
appointment of Treasury Secretary Maria Luis Albuquerque to replace Mr. Gaspar,
highlighting divisions in cabinet about the future of the government's
austerity plan.
Prime Minister Passos Coelho said
late Tuesday in a televised address that he hadn't accepted the resignation,
citing the likely political instability. "I won't resign and won't abandon
my country," he said.
Mr. Gaspar, Ms. Albuquerque has
emphasized a need for the government to keep tight control over its budget. Her
appointment was considered unlikely to lead to a strong shift in policy.
Compared with Greece, another
country pushing through unpopular cost-cutting measures, Portugal's government
was previously united behind austerity measures. In recent months a series of
strikes and street protests in Portugal have tested the limits of the public's
tolerance for cost-cutting.