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Portugal in Bond Market Warning as Politics Remain ‘Shaky’

Friday, 5 Jul 2013 | 6:44 AM ET
David Dear | Photographer's Choice | Getty Images

Portugal's president Anibal Cavaco Silva warned that the country may be unable to return to the debt market next year as planned, amid analyst concerns that the political turmoil afflicting the country could linger for some time.

Portuguese 10-year government bond yields fell back to 6.8 percent on Friday - after surging past 8 percent on Wednesday - following assurances by the prime minister that he could stabilize the government.

Pedro Passos Coelho on Thursday said he had "found a formula" to maintain government stability, after the government's finance minister and foreign minister resigned within just 24 hours.

But the political chaos has raised concerns about the country's ability to meet the fiscal deadlines associated with its bailout, and its ability to return to the bond markets.

(Read More: New Portugal Elections Won't Change Anything: Former PM)

"The incapacity of returning to the [bond] markets in 2014 could even be a result of the troika not being ready to sign off in a positive way on the rescue package," Cavaco Silva told a press conference on Friday.

Ishaq Siddiqi, market strategist at ETX Capital, said this scenario would be a major setback for Portugal.

"It places them back at square one: unable to offload their debt," he said.

"Portugal has been a good student by keeping on track of this and was welcomed back to the debt market, but if they are not able to return, investors will view the country's progress over the past two years as somewhat pointless and undone."

Elections Won't Change Anything: Portugal's Former PM
Pedro Santana Lopes, former prime minister of Portugal, tells CNBC that even if Portugal had a new government the policies would not change because of Troika demands.

Unpopular Austerity

Portugal, which is experiencing its biggest economic slump since the 1970s, agreed on a 78 billion euro ($100.6 billion) bailout from the European Union and International Monetary Fund in 2011. Its international lenders are due to begin their next review of the country's economy on July 15, although this could be delayed.

Jennifer McKeown, European economist at Capital Economics, warned that the extent of reforms and cost cutting required meant the political situation in Portugal would remain unstable.

(Read More: Euro Slides as Draghi Commits to Low Rates)

"Voters are very much against the austerity that the government is being forced to implement in order to keep up with the terms of its bailout," she told CNBC.

"There is a limit of what politicians can do – for as long as austerity to this extent it required, the government will remain on shaky footing."

Early elections – perhaps later this year – looked likely, she added.

Siddiqi also questioned how long immediate concerns regarding Portugal's political situation could be abated.

"It's clear from the resignations from two ministers… that both the public and ministers are anti-austerity," he said.

"If the government can't function effectively and has to implement harsh austerity, this will fuel civil unrest and public outcry which could, again, rock political stability to its knees. That could see the government implode again, paving the way for new elections."

But Chris Scicluna, head of economic research at Daiwa, said the likelihood of an early election had been diffused.

"The crisis has been nipped in the bud – for now," he told CNBC. "But our expectation is that, in due course, given the pressures on government to push pushing ahead with its painful reform obligations, significant stresses will emerge anyway."

(Read More: ECB, Not Portugal, Is Main Threat to Euro)

-- By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop

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