The motion of rejection submitted by the Socialist Party against the programme of the 20th Constitutional Government was passed in parliament with 123 members of parliament voting in favour on Tuesday evening.
The 123 votes came from the Socialist, Block of the Left, Communist, Green and PAN parties. The minority centre-right coalition government of the Social Democrats and Popular Party obtained 107 votes.
In accordance with constitutional article 195, the government must resign but the existing ministers will retain their positions while a new government is formed to take office.
Mr Passos Coelho’s minority government is the shortest lived government in Portugal’s post-war history.
The country’s immediate future now hinges on the decision of president Anibal Cavaco Silva, who had promised to bar anti-EU forces from taking office, less than a month ago. Cavaco Silva could be forced into a dramatic U-turn or put in place a caretaker government until new elections are held in April 2016, at the latest.
Should the president relent, a new Left-wing government could be put in place by the end of the week.
“A Left-wing government would shift policy from fiscal austerity to modest loosening, while a caretaker government would probably be unable to pass any key legislation, including the crucial 2016 budget,” said Antonio Montilla, analyst at Citi.
Despite formally exiting its bail-out deal, the Portuguese economy remains lumbered with the highest combined debt burden in Europe.
Its former creditors in Brussels and the IMF have warned that the country needs to continue to follow a stringent programme of spending cuts and tax hikes to plug the hole in its public finances.
Before the vote, Jeroen Dijsselbloem, president of the eurozone finance ministers, said that the EU was ready to work with any new government.
“There is always a legitimate government in every member state and that is the government we work with,” said the Dutch finance minister.