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Portuguese turmoil prompts new euro zone fears

Analysis: Lisbon's power struggle lays bare divisions over austerity.

Pedro Passos Coelho Portugal crisis 3 7 2013Enlarge
Portuguese Prime Minister Pedro Passos Coelho addresses the nation from his official residence at Sao Bento palace in Lisbon on July 2, 2013. (PATRICIA DE MELO MOREIRA/AFP/Getty Images)

BRUSSELS, Belgium — Within 24 hours, Portugal has been thrown into political turmoil by the resignation of two key ministers, casting doubt on the country's ability to get its economy back on track and raising fears of a renewed euro,zone crisis.

Prime Minister Pedro Passos Coelho late Tuesday refused to step down despite the split in his government, but he recognized the risks facing his country as it struggles to return to financial markets and pull out of a deep recession. 

"It's now clear for all the Portuguese that the risk of political instability in the current circumstances brings threats with very serious consequences," Passos Coelho said in a televised address to the nation. "The great efforts of the past two years, and the sacrifices made by every family, would be wasted."

The departure of Foreign Minister Paulo Portas and Finance Minister Vitor Gaspar has laid bare divergences within the government over the tough austerity policies pursued in line with the terms of a $101 billion international bailout which rescued the country from bankruptcy in 2011.

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Combined with new doubts about Greece's ability to meet deficit-cutting targets, the power struggle in Portugal is a stark reminder that the euro zone's fragile southern members continue to strain the currency bloc's cohesion, despite last year's market-calming intervention by the European Central Bank.

Traders were already hitting the panic button on Wednesday, sending Portugal's borrowing costs skyward while Lisbon's main stock index tumbled.

Portugal's government is a coalition of two rival conservative parties, the Social Democratic Party led by Passos Coelho and Portas' Democratic and Social Center. Without the support of Portas' smaller party, the government would no longer have the parliamentary majority needed to approve policy.

In his speech to the country, Passos Coelho rejected Portas' resignation and appealed to his party to stay in the coalition. 

However, Portas' resignation letter said his decision to step down was "revokable" and other ministers from his party were expected to walk out of government Wednesday. 

Opposition parties demanded immediate elections. "Our country needs a new government, a strong, competent and cohesive government," said Antonio Jose Seguro, leader of the main opposition Socialist Party.

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It's not clear, however, that elections would solve the political standoff or produce a government able to push through the unpopular austerity measures that Germany and European Union headquarters insist are needed to bring down the country's debt and budget deficit.

Polls show the Socialists in the lead but unlikely to win a overall majority — meaning they would have to form a coalition with one of the conservative parties currently in power, or with two far-left parties who are resolutely opposed to the bailout conditions.

Left-wing parties were expected to demonstrate in Lisbon on Wednesday to demand the government's resignation.

Passos Coelho, meanwhile, was headed to Berlin for a European summit on youth unemployment called by German Chancellor Angela Merkel. 

A prolonged Portuguese crisis through the summer could prove awkward for Merkel ahead of Germany's elections in September. 

Under Passos Coelho, Portugal has been seen a "model student" of the German-inspired austerity measures imposed in much of Europe. It has enduring three years of deep recession and record unemployment in order to bring debt levels down facing simmering social unrest. 

Failure in Portugal will be seen as a failure of Merkel's wider austerity strategy. 

http://www.globalpost.com/dispatch/news/regions/europe/130703/portugal-crisis-pedro-passos-coelho