Why Portugal has to 'save itself' by Sunday
Portugal's government survived a vote of no confidence on Thursday, but the country is not out of the woods yet. A self-imposed deadline to come to an agreement over the country's bailout looms on Sunday.
The defeat of the motion of no-confidence, which was tabled by the smaller Green party in Portugal, was the latest installment of a political drama that started with the resignation of two government ministers who opposed austerity measures two weeks ago.
The socialist party, which backed the vote of no-confidence on Thursday, must now work with the two ruling coalition parties to come to an agreement over 4.7 billion euros ($6.17 billion) in spending cuts and austerity measures to keep the country's bailout on track until mid-2014.
Analysts told CNBC they were not so sure that the talks would succeed, and that a second bailout for Portugal looked increasingly likely.
"Whether talks succeed depends on how much both sides are willing to bend," Jennifer McKeown, European economist at Capital Economist told CNBC. "It's unlikely they can meet austerity measures that suit the government, opposition and the troika [of international lenders]. This whole process is unlikely to be resolved by Sunday."
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It's likely Portugal will need more money and time, or both, McKeown added. "The longer the delay, the more the bond yields are going to rise and the greater the risks of a second bailout for Portugal, which I think is quite likely."
The yield on Portugal's benchmark 10-year bond was 7.06 percent on Friday. After the vote on Thursday, yields fell from 7.27 percent to 7.03 percent.
Investors have hoped that Portugal, which has been something of a success story so far in implementing reforms and spending cuts required by its 78 billion euro bailout, could exit its bailout program next year.
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Emergency talks between the three main parties are continuing on Friday as part of a "national salvation" pact proposed by the Portuguese President, Anibal Cavaco Silva. He said on Thursday that there was the "serious will and determined effort to achieve an understanding, although we cannot ignore that it is a complex, difficult negotiation," Reuters reported Cavaco Silva as saying after the vote.
"It's possible that they'll reach a solution but it's not a certainty," Chris Scicluna, head of research at Daiwa Capital Markets, told CNBC on Friday. "There would be some incentives for the opposition to force an early election now and I wouldn't rule out a breakdown in these talks." Scicluna told CNBC that Portugal would see its borrowing costs "blow up" and could jeopardize its full return to the bond market, scheduled for next year when the country hopes to exit its bailout program.
Paul Donovan, global economist at UBS, told CNBC that Portugal would struggle to regain full access to the bond markets next year.
"Ultimately they need another bailout, we're in a situation where it's going to be very, very difficult for them to come back to the markets as they're supposed to. They'll need some further assistance and it's simply the terms under which that assistance is negotiated… we really could do without further political turmoil, frankly, because that just scares investors."
Correction: This story has been corrected to reflect the comments in the two final paragraphs were made by Paul Donovan from UBS.
- BY CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt