Anti-euro parties agree to back Socialists' bid for power in move which threatens to derail former bail-out economy
Portugal is set for a governing alliance of Socialists, Communists and radical anti-euro Leftists after weeks of political stalemate could result in a "Berlin wall" moment for former bail-out country.
Following an inconclusive election earlier this month, Portugal's main opposition Socialist party (PS), has struck a deal with the Communist Party and radical Left Bloc , in a bid to form a majority coalition in the 230-seat parliament.
"The conditions are in place for a government to be formed with majority support in Parliament," he said.
Both the Communists and Left Bloc - who are small, but stridently eurosceptic parties - were the surprise winners of the vote, gaining 18pc of the votes between them. The Socialists came second, behind the ruling centre-right coalition.
After weeks of political horse-trading, the Left parties have managed put their differences behind them. They have reportedly agreed to a full reversal of public sector salary cuts as part of the coalition deal, according to local media. Such a move would derail the Portugal's attempt to comply with tough spending rules imposed by the European Union.
Mr Costa, however, has promised not to jettison his party's moderate, pro-Europe stance and will continue to comply with its post-bail-out conditions if he becomes prime minister.
Should the coalition gain parliamentary and presidental approval, Portugal would become the second Left-wing alliance in the eurozone, after the re-election of Greece's Syriza in September.
In a sign of investor anxiety at the prospect of an anti-austerity government in southern Europe, Portugal's default risk has jumped by more than 20pc since Friday.
But there is still a chance that the incumbent conservative coalition of prime minister Pedro Passos Coelho, will be given a mandate to form a minority government. Mr Passos Coelho's ruling alliance oversaw the implementation of four years of bail-out conditions, but lost its parliamentary majority earlier this month.
• Indebted Portugal is still the problem child of the eurozone
Portugal's president, Aníbal Cavaco Silva, is expected to nominate a prime minister within the next few days. Analysts expect him to favour Mr Passos Coelho over Mr Costa's left-wing alliance.
Despite formally exiting its bail-out programme last year, the economy continues to be plagued by the highest combined debt levels in the eurozone and has suffered a record "brain-drain" as hundreds of thousands have left the country in search of work.
• Political stalemate threatens to derail eurozone's model pupil
Political uncertainty has already seen Portugal become the first eurozone member state to miss an October 15 deadline to submit its draft budgetary plans to Brussels. The European Commission has now written to Lisbon demanding an immediate resolution, according to vice-president Valdis Dombrovskis.