Portugal braces for deepened political crisis

Portugal's Prime Minister Pedro Passos Coelho. (AFP)

Portugal's Prime Minister Pedro Passos Coelho. (AFP)

Reports from Portugal's local media on Wednesday said Agriculture Minister Assuncao Cristas and Social Security Minister Pedro Mota Soares would follow their CDS-PP party leader Paulo Portas, who tendered his resignation on Tuesday.

Prime Minister Pedro Passos Coelho told the nation late on Tuesday that he did not accept Portas's resignation and would continue to head the government to ensure political stability and work to overcome the stalemate. Under Portuguese law, the prime minister can refuse to accept the resignation of a minister.

"With me, the country will not choose political, economic and social collapse," Coelho said in a televised address. "There is a lot of work to be done and we have to reap the fruit of what we sowed with so much effort," he said, referring to the singeing austerity measures implemented under the bailout.

But with no solution imminent, Portugal's bond prices slumped further.
The returns investors demand to hold 10-year bonds surged to above 7.5% for the first time since November.

Portugal's PSI 20 stock index slumped 6%, led by sharp losses of over 10% in banks' shares.

Coelho's decision puts the responsibility for the government's survival squarely on the shoulders of Portas, who now has to decide whether to stay in his post or pull his rightist CDS-PP party out of the coalition. Without the CDS-PP, the centre-right government would lose its majority.

The party's top brass will hold a meeting later on Wednesday, after which Portas may make a statement, according to Diario de Noticias.

Finance Minister Vitor Gaspar, the architect of a programme of spending cuts and tax hikes required by foreign lenders as a condition of their support, resigned a day earlier, citing an erosion in support for the bailout.

Exit path
Coelho has fought tooth and nail to keep his country on a trajectory to exit its €78-billion bailout next year as scheduled, but the measures have pushed Portugal deeper into its worst economic crisis since the 1970s.

"It would be a rushed move to accept this resignation request," said Coelho. "I have not asked the president to remove the foreign minister ... a coalition government cannot be put in jeopardy unless there are enormously serious divergences."

Portas said he was resigning because he objected to the appointment of Treasury Secretary Maria Luis Albuquerque to replace Gaspar.

"The government has fallen apart," said Antonio Jose Seguro, head of the opposition Socialists. "The prime minister has lost all legitimacy to govern."

Portuguese bond prices fell sharply after Portas's announcement, with the returns investors demand to hold 10-year bonds rising 35 basis points. The news weighed on the euro.

"There are increasing reasons to be concerned about developments in Portugal, which has been the 'forgotten country' for much of the [eurozone] crisis," said Alex White, an analyst at JP Morgan, in a research report.

"The rug is being pulled out from under the Passos Coelho government and Portugal is now staring at the prospect of early elections," said Nicolas Spiro, managing director at Spiro Sovereign Strategy. "The back-to-back resignations throw the political opposition to reform in Portugal into sharp relief and pose serious questions about the country's ability to push ahead, let alone exit, its troubled bailout programme."

Not Greece
Lefteris Farmakis, an economist at Nomura Securities, said he did not expect a Greece-style political crisis with radical parties gaining importance.

"The [opposition] Socialists are a mainstream party and they have a strong lead in opinion polls. The outcome of any election would be within the previous political spectrum, not like in Greece, where new forces emerged," he said.

Opposition to austerity has risen steadily this year since the sharpest tax hikes in living memory. There was a general strike last week and leading business confederations have also called for an easing of austerity.

Officials from Portugal's troika of international lenders – the European Union, International Monetary Fund and European Central Bank – are due to start their next review of the economy on July 15.

Portugal has struggled to meet the terms of its bailout as the recession has deepened, and Coelho has said he may seek a further relaxation of budget deficit limits if the economy worsens further.

The centre-right government has led the country ever since Portugal got the bailout, requested by the former Socialist government before it collapsed, in 2011. – Reuters

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