Portugal PM issues stark warning ahead of crunch vote

A rejection compels the government to stand down.

Passos Coelho's remarks were made as he unveiled the programme of his new minority government which was sworn in just 10 days ago but seems certain to be ousted by a leftwing alliance in a dramatic parliamentary vote set for Tuesday.

The party (PS), which last week formed an unprecedented alliance with the far left and appeared set to take over the government, will along with other lawmakers vote on the issue on Tuesday.

Government bond yields hit a five-month high, while shares fell 1.9%.

Portuguese Prime Minister Pedro Passos Coelho delivers his speech during the swearing in of the new government at the Ajuda palace in Lisbon.

The opposition Socialist Party (PS) has forged an alliance with the Left Bloc and the CDU coalition, comprising the Communist Party and the Greens, to create a 122-seat majority in the 230-seat parliament and force the government's resignation.

Measures agreed with the BE and Communist parties to get them on-side include bringing back four bank holidays taken away during the country's bailout, along with reversing the privatisation of Portugal's national airline TAP-Air, and raising the minimum wage in the coming years.

"The scenario of a left-wing government and the ousting of the centre-right is about to become reality, which the markets obviously don't like", said Joao Lampreia, an analyst at Banco BiG in Lisbon.

Bond jump On Monday, Portugal's benchmark 10-year bond yields jumped more than 20 basis points to 2.87 per cent. This was their highest since July, anticipating higher borrowing costs after the communists announced their support on Friday.

An ouster of the pro-austerity centre-right and the possibility of a leftist government could undermine Portugal's timid economic recovery and improving public finances if there are spending hikes despite Socialist pledges to respect budget discipline.

The radical Left Bloc (BE) and the Communist party have lent their support to the Socialist Party in a move that, according to the Financial Times, has united the left of the country completely for the first time in 40 years.

In what could then be a lengthy and economically damaging process, President Anibal Cavaco Silva could ask Passos Coelho's government to remain in a caretaker capacity pending a new election next year or invite Socialist leader Antonio Costa to form a leftist government.