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International auditors arrive in Lisbon on Monday to begin an eighth evaluation of Portugal's economy under its 78-billion-euro bailout as government austerity measures get bogged down and borrowing costs soar.
The experts from Portugal's so-called "troika" of creditors -- the International Monetary Fund, the European Commission and the European Central Bank -- will assess Lisbon's progress in implementing reforms agreed to in exchange for the bailout granted in May 2011.
The evaluation -- which will decide if the bailout's next tranche of aid will be paid -- had initially been due in mid-July but it was put off due a political crisis sparked by the resignation of two key ministers that pushed the centre-right government of Prime Minister Pedro Passos Coelho to the verge of collapse.
While the government managed to survive the political crisis, its attempts to overhaul the economy continue to be derailed by Portugal's Constitutional Court which last month struck down a reform allowing civil servants to be laid off if they fail to requalify for a new job.
The ruling was the latest in a series of blows to Portugal's efforts to fix its finances and it caused the yield on Portuguese government 10-year bonds to surge above 7.0 percent to levels near which it was forced to seek international aid two years ago.
"The Constitutional Court's verdict contributed to the surge in the yield in a context of a generalised rise," Filipe Silva, public debt manager at Banco Carregosa, told AFP.
Portugal remains the eurozone's second-most risky country after Greece but it posted higher-than-expected growth of 1.1 percent in the second quarter as exports soared, putting an end to more than two years of continuous contraction.
The government has announced fresh austerity measures, including an average 10 percent cut in the pensions of most government workers which has been loudly opposed by opposition parties and labour parties.
"If the government imposes yet more austerity, Portugal will move closer to Greece, the recovery will be stifled and the deficit will slip," Pedro Lains, an economic historian at the University of Lisbon and popular blogger, told AFP.
The government needs to "loosen the clamp" on austerity but "the prime minister wants to continue to impose a very strict programme that goes beyond the demands of the troika", he added.
Deputy Prime Minister Paulo Portas, the leader of the Popular Party, the junior partner in Portugal's ruling coalition which is more in favour of easing austerity than Passos Coelho, on Wednesday urged Portugal's international lenders to ease its 2014 public deficit reduction target from 4.0 percent to 4.5 percent of GDP.
The appeal got a cool response from Brussels, which is keen to reassure markets that Portugal will be able to return to the long-term bond market in 2014 as the bailout deal envisages.
"I don't think maintaining the discussion (over deficit targets) sends out a good signal," Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of eurozone finance ministers, said Friday at a meeting of eurozone finance minister in Vilnius.
The "troika" has agreed to relax Portugal's deficit targets twice before, in March and September 2012.
Many anlysts doubt the government will be able to meet its deficit target for this year of 5.5 percent of GDP but Lisbon insists it is on track.
Portugal will test market appetite for its debt on Wednesday when it hopes to raise 1.0-1.25 billion euros of three- and 18-month treasury bills.
The Portuguese government had originally planned to raise 1.5 billion euros ($2 billion) in the auction but then lowered its target.