Budget talks between Portugal's Socialist government and the main opposition party ended today without a deal, raising the risk of a political and financial crisis in one of the euro zone's weakest members.
Lacking a majority in parliament, the government of prime minister Jose Socrates needs the opposition Social Democrats (PSD) to support, or at least not to oppose, its budget bill to ensure passage. The PSD has yet to make its position clear.
Government and opposition have been at loggerheads over how to cut Portugal's swollen deficit, with the PSD insisting that spending cuts should have priority and the government preferring a more balanced approach that includes tax hikes.
The spread between Portuguese 10-year bond yields and German benchmark issues shot to 332 basis points, up from 312 earlier in the session, on news the talks had failed. After hitting lifetime highs at the end of September, the spread -- a gauge of investor sentiment on the country's financial health -- had narrowed in recent days on hopes of a budget compromise.
Portugal's partners in the eurozone have heaped pressure on both sides to strike an agreement before a first vote in parliament on November 3rd.
Mr Socrates has threatened to resign if the budget is not approved and ministers have warned that Portugal could be forced to seek a financial rescue, as Greece did earlier this year.
"The negotiations ended and there is no agreement," said a PSD spokesman.
Finance minister Fernando Teixeira dos Santos said there would be no further talks. The government was unwilling to abandon its deficit goals under PSD pressure. Portugal would face a financial crisis if the budget was not passed.
"The scenario that I see if that happens is very worrying. It will push the country into a very deep financial crisis," Teixeira dos Santos said.
Such a scenario, if the government were to resign, could involve lengthy uncertainty. Under the constitution, there cannot be an election until May at the earliest, because the country goes to the polls in January to elect a new president.
Until then some sort of caretaker government would probably be in charge.