Portugal markets hit as left-wing coalition looms

Portugal Prime Minister Pedro Passos Coelho Image copyright Getty Images
Image caption Portuguese Prime Minister Pedro Passos Coelho faces being ousted this week

Portuguese bonds and stocks were hit on Monday as a coalition of left-of-centre anti-austerity parties looked set to form the country's next government.

The opposition Socialists struck a deal with two smaller far-left parties over the weekend, all but guaranteeing Prime Minister Pedro Passos Coelho will fall.

Mr Passos Coelho's party emerged as the largest in October's election, but has no absolute majority.

Government bond yields hit a five-month high, while shares fell 1.9%.

"The scenario of a left-wing government and the ousting of the centre-right is about to become reality, which the markets obviously don't like," said Joao Lampreia, an analyst at Banco BiG.

Portugal's benchmark 10-year bond yields jumped over 20 basis points to 2.87%, the highest since July, as investors anticipated higher borrowing costs.

Socialist Party leader Antonio Costa sealed the so-called "Triple Left" pact with the Communist Party and Left Bloc over the weekend.

Together they will have 122 seats, enough to out-vote the centre-right coalition government, which was left with only 107 after October's inconclusive elections.

Rating jitters

A vote on the government's programme is likely to take place on Tuesday, when the leftist parties are set to use their parliamentary advantage to topple the minority administration.

Matt Cairns, a strategist at Rabobank, said there were fears a change in government "could end up in some wind-back of austerity measures".

Another analyst, Rainer Guntermann at Commerzbank, warned "rating jitters are also on the rise for Portugal".

Amid the political uncertainty, Portugal's only investment grade credit rating will be assessed on Friday by credit agency DBRS.

The loss of that rating would bar Portugal from the European Central Bank's quantitative easing (QE) programme, Commerzbank warns.

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