“The risks and challenges of the near future are enormous,” Gaspar wrote in his resignation letter dated July 1.

“They demand government cohesion.” The EU may consider extending the deadline for Portugal to meet its deficit targets if economic conditions worsen, Jeroen Dijsselbloem, head of the group of euro-area finance ministers, said on May 27. Dijsselbloem said the government hasn't yet requested another change of timetables and targets.

On March 15, the government announced less ambitious targets for narrowing the budget deficit as it forecast the economy will shrink twice as much as previously estimated this year. It targets a deficit of 5.5 percent of gross domestic product in 2013, 4 percent in 2014 and below the EU's 3 percent limit in 2015, when it aims for a 2.5 percent gap. Portugal forecasts debt will peak at 123.7 percent of GDP in 2014.

Gaspar's resignation shows the risk of reforms faltering, Organization for Economic Cooperation and Development Chief Economist Pier Carlo Padoan said yesterday at the Lisbon Council in Brussels. “Fatigue may suddenly erupt and the temptation to go backward may be very, very strong,” he said.

Eoin Treacy's view It has been our view for some time that while high-level political agreement took time to build within the Eurozone, the greatest challenge is convincing electorates to accept years of austerity. This is all the more difficult in the absence of a concerted growth strategy. Until some form of agreement is reached on how to break the region out of its deflationary cycle, the risk that political unrest will upset the process of fiscal consolidation remains non trivial.

As one of the countries that accepted a heavy burden of debt repayments in return for access to liquidity, Portugal remains dependent on ECB largess. Over the last few years, the ECB has been willing to step in and buy the bonds of troubled sovereigns when spreads widen to unacceptably wide levels. The last time this occurred was when spreads were close to 1300 basis points.

The Portuguese 10-year spread over the German 10-year has surged 400 to 600 basis points since mid-May, breaking the progression of lower rally highs in the process. A sustained move below 500 basis points will now be required to begin to question potential for further expansion.

Greece could also come back into the spotlight in the next few days as the Eurogroup is due to discuss releasing the next tranche of bailout funds on Monday. Greece is due to make fresh submissions on its commitment to reform on Friday. Greek 10-year spreads have rallied from 700 to 1000 basis points since mid-May and a clear downward dynamic would be required to check potential for additional expansion.