This was a bad month for Brussels and Berlin when it comes to Portuguese politics. Just days after Pedro Passos Coelho was reappointed PM by President Anibal Cavaco Silva, Socialist leader Antonio Costa cemented an alliance with the Left Bloc and the Communists on the way to overthrowing the government [10].
The drama came on the heels of inconclusive elections held in October and sets the stage for a government that's less amenable to harsh austerity and far less troika-friendly that Passos Coelho. "While uncertainty about the composition of a new government remains, the most likely scenario involves a minority Socialist party (PS) government with political support from far-left parties. Relative to the previous government, the new government is likely to (a) be more sceptical about fiscal austerity; and (b) contain some minority elements that have been anti-Euro or anti-EU in the past," Goldman said in a note out earlier today.
As we noted earlier this month, Portugal may well honor its obligations but even so, it's hard to imagine that relations between Lisbon and Brussels will won't change materially going forward and that's bad news for Juncker and Merkel, because unlike Greece, Portugal "matters" and the country's debt level (both public and private) is quite high:

As RBS' Alberto Gallo detailed last week, "public debt levels are high (130% of GDP), corporates are highly levered (140% of GDP) and banks have low profitability and asset quality. Q3 GDP ended a sequence of five consecutive quarters of growth – it expanded by 0.5%, the same as Q2. In what symbolises the political stalemate, the government has approved the TAP privatisation (privatisations were a key part of the incumbent government’s reform agenda) while the Socialist have called for it to be halted."
On Tuesday, Sliva finally decided to name Costa PM. As Reuters reports [11], the announcement "ends weeks of political stalemate and paves the way for the first Socialist government backed in parliament by the far left."

As Reuters goes on to note, "the Socialists have promised to end years of harsh austerity, increase families' disposable incomes and help the poor, who suffered during Portugal's debt crisis and the bailout that ended last year."
Although it's not clear what the alternative would have been, Silva attached a number of conditions to the nomination including "written assurances from Costa that he and his leftist partners would respect Portugal's commitments to EU budget rules, something that Costa - but not his partners - had pledged to do." Some analysts are afraid the country's economic "recovery" could be derailed.

"The ascent of 54-year-old Mr. Costa, the former mayor of Lisbon, makes Portugal the second eurozone country this year after Greece to rebel against a belt-tightening recipe imposed on troubled Southern European economies by the European Union’s executive arm," WSJ [12]said, adding that "Costa’s administration will be the first Portuguese government supported by far-left parties in the country’s four decades of democratic rule."

The worry for the troika is that this is the first step towards an outright repudiation of Berlin's brand of fiscal rectitude. Underscoring that is Socialist lawmaker Francisco Assis who says his party will be "a hostage of a far left."
Yes, a "hostage to the far left" and you know what that means when it comes to austerity and debt negotiations.
Sorry Jim, looks like you missed this one:

