The Situation In Portugal Remains Volatile

REUTERS/Jose Manuel Ribeiro

Traders monitor the screens at a bank in Lisbon July 3, 2013. Portugal's benchmark PSI20 equity index tumbles 6.4 percent in massive volumes, hitting a near eight-month low, as the country's political crisis fuels fears that Lisbon's plan to exit an international bailout could derail. Portuguese banks are the most hit, with Banco Espirito Santo sinking 10 percent and Banco Comercial Portugues dropping 12.9 percent.

European stock markets are in the green today, recovering some of yesterday's losses.

Leading the way is Portugal, which tanked yesterday after the country's Finance Minister unexpectedly resigned over a dispute about austerity.

"The political crisis that’s unfolding in Portugal is a reminder that staying the course on fiscal consolidation and structural reform crucially depends on the ‘buy in’ of the politicians and the population at large," said Morgan Stanley's Daniele Antonucci. ". A U-turn in policy might perhaps be averted – as the situation is such that there’s little alternative to the current path – but the newsflow surely has become more negative."

"The risk is that, regardless of whether new elections can be avoided, political mistakes or a weaker political commitment might well result in a slower pace of adjustment," he continued. "In turn, this could complicate the upcoming Troika review, with the official lenders struggling to continue to depict Portugal as a ‘good student’, and perhaps delaying future loan tranche disbursements."

Until we get more clarity, we can probably expect more up-and-down volatility.

Here's a look at Portugal's PSI 20 today via Bloomberg:

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