LISBON (Reuters) – Portuguese Prime Minister Antonio Costa resigned on Tuesday, hours after prosecutors detained his chief of staff in an investigation into alleged corruption in his administration’s handling of lithium and hydrogen mining projects.

Costa, who prosecutors said was the target of a related investigation, announced the decision in a televised statement after meeting with President Marcelo Rebelo de Sousa.

He said that his conscience is clear, but he will not run for a fourth time as prime minister.

“The dignity of the Prime Minister’s functions is incompatible with any suspicion of his integrity and good conduct, and even less with the suspicion of any criminal act,” Costa said.

It is now up to the president to decide whether to allow Costa’s Socialists, who have a majority in parliament, to form a new government or dissolve parliament and call elections.

The head of the Socialist Party, Carlos Cesar, said his party was ready for “any scenario,” while Luis Montenegro, leader of the Social Democratic Party, the largest opposition party, said he was ready to hold early elections.

“The deterioration of the government requires that no more time be wasted,” Montenegro said.

Parliament was scheduled to vote on the 2024 budget bill later this month. There are fears that the political crisis may affect the approval of the budget as well as the start of the privatization of Portugal’s national airline TAP.

“It is inevitable that there will be elections after the sudden death of the government,” said political scientist Adelino Maltese. Antonio Costa Pinto of the University of Lisbon did not rule out another socialist prime minister assuming power, but he also said that early elections were the most likely option.

Portuguese stocks fell about 3%, and the closely watched gap between the European Union’s 10-year government bond yield and the euro zone’s benchmark German bond yield widened to 69 basis points from 65 basis points on Monday.

Projects investigated

The prosecutor’s office said earlier on Tuesday that five people had been arrested as part of the investigation, including Vitor Escarria, Costa’s chief of staff, whose offices were searched along with several government buildings.

She also said in a statement that Infrastructure Minister Joao Galamba, who previously served as Energy Minister, and Environment Agency head Nuno Lacasta are official suspects and will appear before a judge.

Galamba’s office and APA did not respond to requests for comment.

Prosecutors are investigating allegations of graft and influence peddling in the Barroso and Montalegre lithium exploration concessions in northern Portugal, a hydrogen plant project in the port of Sines, and a massive data center investment there.

They said they became aware that the suspects used Costa’s name and authority to “open proceedings” related to the deals, and the Supreme Court will look into Costa’s possible role in the deals.

Costa said he was “fully prepared to cooperate” with the judicial system.

“There may be at stake… facts that could constitute crimes of malfeasance, active and passive corruption of politicians and peddling of influence,” the prosecutor’s office said.

With more than 60,000 metric tons of known lithium reserves, Portugal is seen as central to Europe’s efforts to secure more of the battery value chain and reduce reliance on imports.

The APA earlier this year gave environmental approvals to local company Lusorecursos to extract battery-grade lithium in Montalegre and to London-based Savannah Resources (SAVS.L) to develop its own mine in Barroso.

Contacted by Reuters, Lusorecursos had no immediate comment.

Savannah said in a statement that it was cooperating with authorities who visited some of its locations, but neither the company nor any of its employees were the target of the investigation. She added that work on the Barroso lithium project continues without any obstacles.

Lithium projects have faced strong opposition from local residents and environmental activists.

In a joint statement, Portuguese anti-mining groups said Tuesday’s developments were evidence that mining operations were not conducted in a transparent manner, and called for the “immediate cancellation” of all lithium projects.

Fears about the future

Costa will remain in his position until the president’s decision. Rebelo de Sousa summoned political parties for consultation on Wednesday and his advisory body, the Council of State, on Thursday.

Since coming to power in 2015 in the wake of the debt crisis and international bailouts, Costa has overseen a period of strong economic growth during which his successive governments have managed to narrow budget deficits and reduce the debt burden, and he has won praise in Europe for sound fiscal policies. .

But Costa’s last term, which began in early 2022 when his party won a surprise absolute majority in snap elections, was marred by scandals, including a controversy over state-owned airline TAP in January 2023, prompting opposition parties to demand the resignation of his government.

Carsten Brzeski, global head of macroeconomics at ING, predicted little fallout in financial markets thanks to Portugal’s hard-earned reputation there.

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