Portugal appears headed for a perfect storm, with a growing financial crisis brewing at the same time that its outgoing government says it lacks the authority to seek an international bailout.

Overnight, Portugal’s borrowing costs hit fresh euro-era highs after the country revealed that its 2010 budget deficit was substantially higher than previously reported.

The shock revision fuelled market fears that the Portuguese government may struggle to raise enough funds to repay the €9.3 billion ($13.2 billion) in bonds that mature in April and June, and comes at a time when the country is already in the grip of a political crisis. Last week, Portugal’s minority Socialist government resigned after parliament rejected a key austerity package.

Portugal’s finance minister, Fernando Teixeira dos Santos, sought to calm investor fears, saying that the government guaranteed that it would meet its upcoming debt repayments.

But he conceded that the outgoing government could not seek a bailout from the $1 trillion European Union-IMF emergency rescue fund. “Until new elections, this government has neither the legitimacy nor the power to negotiate any agreement at all,” he said.

Portugal’s president, Aníbal Cavaco Silva, has set the snap election for June 5. But under the Portuguese constitution, a new government cannot take office until later in the month. That means that, even if the Portuguese financial crisis escalates, the country will not be able to apply for an emergency rescue for almost three months.

Portugal’s financial crisis intensified overnight after the country’s official statistics agency revealed the 2010 budget deficit hit 8.6% of GDP last year, well above the 6.8% the Portuguese government had previously claimed. The blow-out came after the European Union’s statistics agency, Eurostat, forced Portugal to include in its deficit calculations a €2 billion cash injection into nationalised Banco Portugues de Negocios and loans made to unprofitable mass-transport companies.

Investors reacted by dumping Portuguese bonds, pushing their yields sharply higher. Yields on five-year debt soared to a euro-era high of 9.52%, while those on 10-year bonds hit 8.3%. Most investors believe that these interest rates are simply unsustainable, leaving Portugal with no option but to seek a bailout.

What’s more, these higher interest charges will begin to bite quite quickly, making it even more difficult for the country to meet its target of reducing the budget deficit this year to 4.6% of GDP this year. Portugal has set out plans to borrow up to €7 billion short-term debt over the coming three months.

Meanwhile, the growing political and financial crisis in Portugal has prompted the ratings agencies to downgrade the country’s credit rating, and to warn of further downgrades ahead.

Overnight, Standard & Poor’s, which earlier this week cut Portugal’s credit rating to triple B minus — one notch above junk — downgraded four of Lisbon’s leading banks.

At the same time, Moody’s warned that the eurozone’s peripheral economies — Portugal, Ireland and Greece — could see their ratings cut further. Moody’s said these countries would likely find it more challenging to raise funds, and that the latest European Union agreement on a permanent rescue fund left bond holders exposed to losses.

*This article was first published at Business Spectator