Portugal is in a bind to find a new government after the prime minister has stepped down and parliament has been dissolved. The country's political instability is matched by great financial uncertainty.
A new government will face huge economic challenges
Portugal's president has announced snap general elections, as bad news on the country's deficit continues to stoke fears that Portugal could follow in Greece and Ireland's footsteps, eventually asking the eurozone for a bailout.
"The next government will face an unprecedented economic and financial crisis," Portuguese President Anibal Cavaco Silva said upon dissolving parliament Thursday.
"The country's difficulties are so deep that nobody can have the illusion that they will disappear from one day to another," he added.
Cavaco Silva announced Portugal would have fresh elections on June 5. All the countries' political parties represented in parliament gave their unanimous support for early polls.
The decision came at a time of increasing financial insecurity as Portugal released a higher than expected deficit figure and saw harsh blows to its credit ratings.
Government to stay on
The government of Prime Minister Jose Socrates is set to remain in place until new leadership is elected but will not have the power to make decisions on matters such as requesting a bailout, according to Finance Minister Fernando Teixeira dos Santos.
Socrates stepped down after his spending cuts received a no-confidence vote
"This [caretaker] government does not have the legitimacy, nor the conditions to negotiate in this way," the minister told a press conference as Lisbon.
"The government is not irresponsible and will guarantee that there is the necessary financing so the country can live up to its responsibilities and honor commitments to its creditors,” he added.
Former Prime Minister Socrates, who stepped down last week after a no-confidence vote on his proposed austerity measures, has continually insisted that Portugal does not need a bailout.
The economic challenges mounted Thursday as the country missed its budget deficit goal for 2010.
Portugal presented new figures showing its 2010 budget deficit totaled 8.6 percent of gross domestic product (GDP) - more than a full point over the previous estimate of 7.3 percent.
Ratings agency Standard & Poor's reacted by downgrading Portugal to BBB status - just one step above junk level.
Lisbon said the upward revision of its deficit was due to a simple accounting change demanded by the European Union's statistics agency.
"These [revisions] are very much one-off factors and don't have a bearing on the deficit for next year," said James Nixon, co-chief European economist at Societe Generale.
"That doesn't mean to say there shouldn't be a funeral march for Portugal. Funding is untenable given where yields are."
Portugal's pockets are empty but the euro has yet to feel the pinch
Euro safe for now
Economists have focused on two large Portuguese bond redemptions in coming months. Most of them say the country will be able to repay around 4 billion euros ($5.63 billion) in April.
The euro remained strong, trading at $1.4170 on Thursday, despite worries concerning Portugal and Ireland, whose banks revealed a 24-billion-euro hole the same day.
After the eurozone's sovereign debt crisis took hold in 2010, the euro so far this year has steadily risen against the dollar, driven by expectations that the European Central Bank will begin tightening its monetary policy next week.
Author: David Levitz (AFP, dpa, Reuters)
Editor: Martin Kuebler