Portugal's President decided on Monday to call a council of state on March 31 to consider when to hold a snap election as the country's bond yields spiked to record highs on political uncertainty after the prime minister resigned.
President Anibal Cavaco Silva summoned the council of state - an advisory body made up of senior political figures - to decide on the next steps in the crisis, which many economists say is likely to push Lisbon to seek a bailout.
"It's just a very messy situation right now with lots of events risk, so any clarification on the election would be welcome," said David Schnautz, a debt strategist at Commerzbank.
"Right now with all the uncertainty I just can't imagine any buyers showing up to offset even minor selling pressure in Portuguese debt," he added.
Portuguese debt yields soared to new record highs as investors consider a bailout for the debt-ridden country as all but inevitable with funding costs well above levels seen as sustainable for Portugal's weak economy.
Five-year bonds yielded as much as 8.8 per cent bid, while the benchmark 10-year bond was at 8.17 per cent, up from Friday's 8 per cent. The premium investors demand to hold Portugal's 10-year bonds rather than German Bunds was just 2 basis points (bps) short of its euro lifetime record of 489 bps set on Nov. 11.
The political crisis has prompted Standard & Poor's and Fitch to downgrade Portugal's credit ratings, with S&P warning it could downgrade it further this week.
After the meeting of the council of state, Mr. Cavaco Silva is expected to dissolve parliament and call an election that can happen at the earliest at the end of May.
"It looks like the election is going to be just before Portugal may need a bailout, so the wait period and the date are quite delicate issues," Mr. Schnautz said.
Portugal has a large volume of debt maturing in the next few months. Most economists agree Lisbon should be able to repay around €4.3-billion euros ($5.9-billion) of bonds falling due on April 15. There is another payment of €4.9-billion in June.
Prime Minister Jose Socrates, who resigned last Wednesday after losing a key vote on his government's latest batch of austerity measures, retains full powers until the President's decision and is expected to continue as a caretaker until a new government is formed after an election.
On Friday, the leaders of the main political parties urged the President to call a snap election in late May or early June, rejecting the option of a coalition cabinet.
The three main parties, including Mr. Socrates' Socialists and the main opposition Social Democarts (PSD), have assured Mr. Cavaco Silva they were committed to budget deficit goals Portugal had promised to Brussels, the President's office said.
But last week's rejection of the government's measures in parliament and sharp criticism of the opposition by Mr. Socrates showed they differed on means of achieving this.
Also, although the PSD leads in opinion polls, it is far from certain to win an absolute majority in a parliamentary election, and analysts say the Socialists' election machine should not be underestimated as it could upset the PSD's hopes.
"Political uncertainty will make it more difficult for the yields to go down, so the bailout now is very likely," said Diego Iscaro, an economist at IHS Global Insight in London.
He said the idea of a bridging loan voiced by PSD leader Pedro Passos Coelho in an interview with Reuters over the weekend could be a temporary solution for Portugal, but everything would depend on the conditions for the loan.
"Portugal should be okay to repay its debt in April with the money it has raised so far this year, but the next repayment will probably require some sort of a solution and a bridging loan may help, at least as a temporary fix," Mr. Iscaro said.
"But we'll have to see at what rates they arrange it and from whom. If the interest rate is higher than in the rescue fund, it probably makes more sense to get a bailout," he said.