LISBON Left wing parties ousted Portugal's ruling centre right on Tuesday, in the first such move against an elected government since the end of dictatorship in 1974, paving the way for a Socialist led administration to end years of austerity.
The minority government warned that a retreat on austerity could put Portugal on a similar path to Greece while the left celebrated the chance to raise incomes that were cut during the financial crisis, cut taxes and protect social benefits.
The prospect of a government backed by the far-left Communists and Left Bloc has rattled investors and prompted fears that a fragile economic recovery could be derailed in a country that exited an international bailout only last year.
"The taboo has ended, the wall has been broken," said Socialist leader Antonio Costa, who has engineered the move to oust the centre-right and team up with the far left.
"This is a new political framework, the old majority cannot pretend to be what it stopped being," he said.
Lawmakers forced the government's collapse, with 123 voting against its austerity program in the 230-seat parliament.
Several hundred government supporters gathered in front of parliament singing the national anthem and chanted "Up with (prime minister) Passos (Coelho)" while another group allied to the CGTP labor union rallied in support of the left.
Passos Coelho's centre-right coalition won most votes in an Oct. 4 election and, in keeping with political convention, he was sworn back into office last week by the president.
But, in an unexpected development, the three left-wing parties that amassed a majority in parliament, agreed after the election to put deep ideological differences behind them and group together to get rid of the centre-right.
They formalized their agreement to provide majority backing for a Socialist-led government on Tuesday just before the vote.
Finance Minister Maria Luis Albuquerque warned parliament that investor confidence was already waning, while failure to cut the budget deficit in line with Lisbon's EU commitments could provoke a new debt crisis and need for another bailout.
"We don't need to imagine the consequences, it's enough to look at the recent experience of Greece and the cost of their attempt to end austerity ... More recession, more poverty, more joblessness and more dependence on European and IMF lenders."
The Socialists insist they would respect European Union budget rules as returning incomes to households should boost the economy. But many economists have questioned their plans.
Lisbon's stock market closed 0.3 percent lower, extending a tumble of more than 4 percent on Monday. Bond yields fell slightly after a 20-point rise the previous day.
"The market has been anticipating this and in the last few days has already shown concern," Patris brokerage stock broker analyst, Albino Olveira, said. "The next important moment is the president's decision."
The formation of a Socialist-led government depends on President Anibal Cavaco Silva. He could ask Passos Coelho's government to remain in a caretaker capacity pending a new election or invite Costa to form a government.
The process could be lengthy and deepen political concerns in a country which missed last month's deadline to present 2016 budget guidelines to Brussels.
"The probable consequences of this (leftist government) experiment are far from clear-cut, but they are likely to be mostly market-negative," Teneo Intelligence consultants vice-president, Antonio Barroso, said.
(Editing by Louise Ireland)