The euro area has had a rough few weeks: Cyprus agreed to a bailout program that will decimate its economy, Italy’s Pier Luigi Bersani, the Democratic Party leader, failed to put together a government, borrowing costs for businesses in the peripheral countries continue to rise, unemployment reached record highs, and purchasing manager indices across the region greatly underperformed expectations.
There may be one more piece of bad news to add to the pile before the week is out: Portugal’s budget for 2013 may fall apart, and with it the Portuguese government.
During his New Year’s Day address, Portuguese President Anibal Cavaco Silva called on the constitutional court to rule whether the budget, which consists of tax increases and spending cuts worth 5.3 billion euros ($6.8 billion), is legal.
If the court rules against the budget, an estimated 2 billion euros of the austerity measures may be compromised. This would immediately derail Portugal’s progress toward hitting its fiscal targets, only weeks after the country’s international creditors relaxed them. Rejection of the budget could also cause the government to collapse if the ruling Social Democratic Party cannot find alternative austerity measures to get Portugal back on track with its bailout program.
It is unclear exactly when the constitutional court will make its ruling, but it may be before the week is out. Concerns over what the court might say could account for an increase in Portuguese two-year bond yields to over 3.8 percent today, before falling back to around 3 percent again later in the day. This isn't what a country looking to exit its bailout program and regain full market access needs.