If ever the cliché "a good deed in a naughty world" was justified it is, surely, in relation to Festival de Almada.

The annual, fortnight-long theatre festival plays in both its home city of Almada (on the south bank of the River Tagus) and in Lisbon (over on the north bank). It continues to be a cultural beacon on a Portuguese artistic landscape ravaged by austerity.

Under the leadership of its highly respected founding director Joaquim Benite and his indefatigable assistant director Rodrigo Francisco, the festival has become an established part of the international theatre calendar. Browse through this year's programme and one finds such luminaries as Swiss theatre maker Christoph Marthaler (whose Meine Faire Dame comes to the Edinburgh International Festival next month) and the great German director Peter Stein. The extensive international programme combines with a strong showcase of Portuguese theatre.

One of the most tantalising offerings in the opening week of this year's Festival was a staging of Shakespeare's The Merchant Of Venice. A co-production between Benite's own company, Teatro Municipal de Almada, and the Teatro Nacional São João (TNSJ) from Porto, it is the vision of TNSJ's acclaimed director Ricardo Pais.

Played on a set which looks something like a chess board, the production seems, at first, like a fairly faithful rendering of the Bard's text. Until, that is, it makes a number of Tarantino-esque jump cuts, hurtling us, before the interval, into an abridged version of the play's closing scene. Somewhat disorientated, the audience returns after the intermission to find itself in Belmont, where (in surely one of Shakespeare's most pointless, and least humorous comic scenes) the heiress Portia sets riddles before her suitors.

Far from being invigoratingly radical, the reordering of the text upsets the narrative irrecoverably. Which is a pity, because Pais's presentation boasts an impressive cast and some fine imagery (much of it courtesy of designer Pedro Tudela's horizontally opening wall, upon which the show is somewhat over-reliant).

The highest profile production of the first week of the Festival was unquestionably Peter Stein's Faust Fantasia. Stein – who directed the superb world premiere production of David Harrower's Blackbird at the Edinburgh International Festival in 2005 – is justly considered one of the greatest living theatre directors. In Faust Fantasia he gives a performed reading from Goethe's Faust, accompanied by a specially-written piano concerto by Arturo Annechino (played by Giovanni Vitaletti).

It is a fascinating piece of chamber theatre which, due to Stein's renown, tends to be performed in main houses around the world (at Festival de Almada it played two nights in the gorgeous 19th-century São Luiz Teatro Municipal in the centre of Lisbon). Annechino's music is, by turns, gently harmonious, violently ominous and wittily playful. Meanwhile, the 74-year-old Stein gives a bravura performance, shifting between the morally exhausted Faust, the sinisterly blithe and persuasive devil Mephistopheles, and the ill-fated Gretchen. In his voices and gestures, the great director proves himself to be an accomplished actor.

Performed in the teeth of swingeing cuts to Portuguese arts budgets, Stein's performance, like Festival de Almada as a whole, makes a powerful case for the argument that, in times of economic stress, society needs, not less art, but more.