LISBON Portugal's Foreign Minister Paulo Portas resigned on Tuesday, plunging the country into a political crisis that could upset its smooth exit from an international bailout.
Finance Minister Vitor Gaspar, the architect of spending cuts and tax hikes imposed by foreign lenders, resigned a day earlier but Portas' departure is even more serious as it threatens the coalition government's stability.
Portas heads the rightist CDS-PP party and, without its support, the centre-right government would lose its majority in parliament. Prime Minister Pedro Passos Coelho was due to address the nation at 7 p.m. (1900 GMT).
"It looks like the end-game for the government," said Antonio Costa Pinto, a political scientist. "There is a possibility of the government staying on in minority with conditional support from CDS-PP, but the opposition will demand a new election and the president will be in a difficult situation."
The next political steps will depend on whether Passos Coelho decides to soldier on without a reliable working majority or if he tries to form a bigger coalition that includes the opposition Socialists.
Opinion polls have shown the Socialists in the lead but without enough support to gain a majority in parliament.
"The president will probably try for a wider coalition government first, but it's all in Portas's hands," said Costa Pinto.
Portuguese bond prices fell sharply after the announcement, with the returns investors demand to hold 10-year bonds rising 35 basis points. The news weighed on the euro.
Portas has been at odds with Pedro Passos Coelho and Gaspar over their adherence to some of the terms of the 78 billion euro ($102 billion) bailout, as Portugal is in its deepest recession since the 1970s. Lisbon hopes to exit the program by mid-2014.
"The rug is being pulled out from under the Passos Coelho government and Portugal is now staring at the prospect of early elections," said Nicolas Spiro, managing director at Spiro Sovereign Strategy.
"The back-to-back resignations throw the political opposition to reform in Portugal into sharp relief and pose serious questions about the country's ability to push ahead, let alone exit, its troubled bailout program."
Gaspar resigned on Monday citing growing erosion of public support for the bailout plan. Portugal entered its third year of recession in 2013 and unemployment is at record highs.
"Clearly the political consensus is getting weaker. We could have a new PM or a technocrat government or a minority government," said Lefteris Farmakis, an economist at Nomura Securities, adding, though, that he did not expect a Greek-style political crisis with radical parties gaining importance.
"The Socialists are a mainstream party and they have a strong lead in opinion polls. The outcome of any election would be within the previous political spectrum, not like in Greece where new forces emerged," he said.
Opposition to austerity has risen steadily this year since the sharpest tax hikes in living memory. There was a general strike last week and leading business confederations have also called for an easing of austerity.
Officials from the 'troika' of lenders - the European Union, IMF and ECB - to Portugal's bailout are due to start their next review of the economy on July 15.
State news agency Lusa quoted a letter sent by Portas as telling the prime minister he strongly disagreed with the appointment of Treasury Secretary Maria Luis Albuquerque to replace Gaspar.
"It is not politically sustainable (for me to stay). The prime minister chose to follow the path of continuity at the finance ministry. I respect it but I disagree," Lusa quoted Portas as saying in the letter.
Still, the swearing in ceremony for Albuquerque went ahead as scheduled on Tuesday afternoon.
Portugal has struggled to meet the terms of its bailout as the recession deepened, and the prime minister has said he may seek further relaxation of budget goals if the economy worsens further.
The centre-right government has led the country ever since Portugal got the bailout, requested by the former Socialist government before it collapsed, in 2011.
(Additional reporting by Sergio Goncalves and Daniel Alvarenga; Editing by Robin Pomeroy)