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Monday, July 22, 2013

Beyond appearances, the recent political crisis has changed things in Portugal

Political stability seems to have returned to Portugal - at least for now. The country's ruling coalition and the opposition Socialist Party have failed to agree on the 'national salvation pact' demanded by President Aníbal Cavaco Silva to help the country successfully complete its EU/IMF bailout programme.

Nonetheless, Cavaco Silva said in a speech yesterday that the continuation of the existing centre-right coalition was "the best [alternative] solution" - thus ruling out snap elections. The Portuguese President also stressed that the government would request a vote of confidence in parliament on its future economic and social policy plans.

So are we back to square one in Portugal? Not entirely.

First of all, there will soon be a cabinet reshuffle - as agreed by the two ruling parties before President Cavaco Silva stepped in. In particular, Paulo Portas - the leader of junior coalition member, the People's Party (CDS-PP) - should become Deputy Prime Minister and be in charge of dealing with the EU/IMF/ECB Troika from now on.

This could be an important change. Let's not forget Portas tendered his resignation from the government because he disagreed with Prime Minister Pedro Passos Coelho over the appointment of Maria Luís Albuquerque as new Finance Minister. On that occasion, Portas made clear that he was hoping for a change in the country's economic policy approach (in substance, less austerity).

This leads to a more general point, which we already made in the past (see here and here). Political consensus around EU-mandated austerity is shrinking in Portugal, and although the turmoil seems to have passed for now, tensions within the ruling coalition will remain - with Prime Minister Passos Coelho's Social Democratic Party (PSD) clearly more in favour of sticking to the current economic policy course than its junior coalition partner.

Furthermore, as Prime Minister Passos Coelho himself admitted this morning, the recent political crisis has "undermined" confidence in Portugal's determination to push ahead with the implementation of its bailout programme - something which could make it more difficult to obtain concessions from the European Commission and its eurozone partners in future.

As we noted in our flash analysis on this issue, these tensions have come at an inopportune moment for the country given that it still needs to enforce significant austerity to meet its targets and that its economic reforms to improve competitiveness now look off track. As political consensus wanes and protests increase, these tasks will become ever more challenging. 

Needless to say, Portugal's return to the markets - currently scheduled for June 2014 - is already looking quite complicated. Further delays or disagreements within the ruling coalition could make things even worse.


Rik said...

Portugal is simply a dead man walking. It will never be able to get itself out of this mess without a default (and heavy haircuts).

Debtlevel, economic basics/potential simply can lead to no other conclusion. We are at 127% debt if I am not mistaken and rapidly rising and an economy which hardly looks better than the coastal parts of China (probably worse than large parts there) but with much higher labor and other costs. It is in a corner of Europe with hardly any potential and logistics costs to say Rotterdam will be around equal to those from China (because they are by truck and China is by ship).
Reform has furthermore come to a standstill.

No way this will work. Just buying time for the rest that will subsequently be waisted and throw in a lot of tax payer money (by bailing all sorts of private sector lendors out.

Country has to get back to say 80-90% debt, plus a new start scenario (not digging the whole deeper like now), to be able to return to markets. Or Germany or the ECB should effectively guarantee the debt, which is not likely to happen.

Anonymous said...

Portugal - like Greece - should never have been allowed into the EU as they never understood what Union meant. Portugal is for the Portuguese. Ordinary Pt's are presumably not aware (although their school history texts clearly justify it) that north europeans never had a chance in setting up businesses in many sectors like basic tourism as it was racist obstructionism not bureacracy holding things up. Until the foreigner, usually a Brit, had wasted their life savings and 'gone home'. To join UKIP or the similar protests in Germany and Netherlands.

Rollo said...

fiddling while Rome burns: Though it is most of Europe burning out while Brussels fiddles on regardless with their fantasies.

F.Barreiro said...

Portugal will survive with EU or without ..we all survivors and when it comes to grant sacrifices we better than any in Europe ,Saying that Germany should remember who helped them when they where in deep trauma and Euro Group need to realise that they might be on the road to self destruct .

Anonymous said...

I live in Braganca, and am working for a university there.
People here are very lazy, and are coming out of their beds and houses only when the sun goes down.
There are every weekend large parties organised here, with free drinks and music. (From what money ?)
I think giving the people here money from the EU was a mistake as it is a bottomless pit, as they spend the money on useless things like these parties.
People spend their times telling nonsense stories in the local cafe's instead of working.