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As Portugal’s Leader Resigns, the Euro is Thrown into Fresh Crisis

As if Portugal didn’t have enough of a crisis already, with the country mired in debt and on the brink of a European Union bailout, it now has political upheaval on its hands.

Following the refusal of opposition parties to support his latest austerity measures, Portuguese Prime Minister Jose Socrates resigned.

The news comes at the start of a two-day EU summit in Brussels, with Portugal’s political uncertainty and fiscal crisis set to dominate the talks. Already, it looks increasingly likely that Europe will need to bail Portugal out of its financial mess.

EU leaders were set to finalize a new format for bailout proceedings, but that decision is likely to be postponed.

Still, Angus Campbell from London Capital Group says investors are hoping for something concrete from Brussels:

“The difficulty for the euro at the moment is of course getting a co-coordinated agreement and more than anything else getting support for Germany which is of course the power house of Europe.”

Germany will provide the lion’s share of any new bailout fund – and Chancellor Angela Merkel said she was sorry Socrates’s austerity measures were rejected:

“It is about the future of the euro, its financial stability, and whether a country and its prime minister – whether a social democratic or Christian democratic – shows responsibility and it is regrettable that parliament did not support the reforms.”

But Merkel has also added to the uncertainly by asking for last minute changes to an agreement reached on Monday. She now wants Germany’s cash contributions to the fund to be spread over five years instead of three.

The cost of Portuguese government euro bonds soared to record highs after Socrates’s resignation. And in the absence of a fully functioning government in Portugal, former Finance Minister Miguel Beleza says the country could now be in limbo for months:

“It’s too long between the actual fall of the government and the dissolution of parliament and the next elections. So we may be in a position of an interim government, so to speak, for perhaps three months or so. Which is never a good idea, and certainly with the problems we are having now, it is not a good idea.”

Bottom Line: With Portugal’s crippling debts and ratings agency Moody’s also downgrading 30 banks in struggling Spain, it seems unlikely the EU summit will bring any form of closure to the sovereign debt crisis just yet.