(FT) -- Portugal's president will begin meeting political parties on Friday in an effort to fill the political vacuum created by the resignation of the prime minister as borrowing costs soared amid mounting fears that the country would have to seek an international bail-out.
Political leaders and analysts said the most likely outcome of the talks was an early election in May or June.
According to Lisbon traders, the yields on Portugal's 5-year, 3-year and 2-year government bonds all jumped to their highest levels since the launch of the euro, as expectations mounted that Portugal will have to follow Greece and Ireland in seeking a financial rescue by the European Union and the International Monetary Fund.
Lisbon's main stock market index fell by almost one per cent in early trading on Thursday. The political crisis also sent Portugal's credit default swaps, the cost of insuring against sovereign default, to two-month highs late on Wednesday.
In a terse statement released after the resignation of the prime minister, Aníbal Cavaco Silva, Portugal's conservative president, said José Sócrates and his minority Socialist government would remain in office with full powers until the president formally accepted Mr Sócrates' resignation submitted on Wednesday night.
Mr Sócrates quit after all the country's opposition parties voted against a government proposal for a tough austerity package -- its fourth in 12 months -- defeating Mr Sócrates in what amounted to a censure motion.
The prime minister will attend the European Union summit in Brussels on Thursday and Friday aimed at finalising a "grand bargain" for shoring up the eurozone's debt-laden peripheral economies, including Portugal.
But Mr Sócrates will lack the political authority to negotiate the deficit-reduction measures he had planned to present to reassure nervous financial markets and EU partners that Portugal would meet its debt payments and avoid the need for a financial rescue.
Christoph Weil, an economist with Commerzbank, said in a report on Thursday it was "hardly likely that Portugal will manage without external support up to new elections".
Antonio Garcia Pascual, an economist at Barclays Capital Research, said the possibility of Portugal turning to the European financial stability facility, the EU's bail-out fund, looked "increasingly likely".
"The timing of any programme will depend, to a large extent, on the funding needs and the cash position of the Portuguese treasury," he wrote in a report.
"Should the treasury have sufficient cash or manage to get a credit line or bridge loan to meet funding needs through June, it would seem reasonable to wait for the new government to negotiate" a rescue package.
Announcing his resignation in a televised address on Wednesday night, Mr Sócrates warned that a financial rescue involving the International Monetary Fund would result in much harsher austerity measures than the programme he had proposed.
Mr Cavaco Silva is expected to sound out the possibility of forming a "grand alliance" of Portugal's main political parties without dissolving parliament.
But deep antagonism between the Socialists and the centre-right Social Democrats (PSD), the main opposition party, makes this improbable.
Analysts said the most likely option was for the president to call an election two years ahead of schedule.
Pedro Passos Coelho, PSD leader, said a snap election would give a new government the opportunity to present new deficit-reduction measures that would restore confidence in the Portuguese economy.
Mr Sócrates also said the crisis could only be resolved by an election. CNN
