Trouble in paradise

27 October 2010 By Neil Unmack Follow @unmack1

The country’s main political parties have failed to agree a new budget, ending the euro zone’s bond market lull. Portugal is struggling with the strong euro and faces a hefty debt refinancing burden. Renewed turmoil may force the ECB to keep propping up Europe’s weakest banks.

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Budget talks between Portugal's socialist government and its main opposition party broke down on Oct. 27.

The minority government needs the support of the opposition Social Democrats to approve its austerity budget for 2011.

Finance Minister Fernando Teixeira dos Santos said failure to approve the budget would "push the country into a very deep financial crisis".

The spread between Portuguese 10year bond yields and benchmark German bonds rose to 332 basis points, up from 312 basis points earlier on Oct. 27.

Credit default swaps on Portuguese debt rose to 352 basis points after the news, up from 330 basis points on Oct. 26, according to Markit. Portuguese government CDS reached 450 basis points on Sept. 27.

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