Governo em risco: Portuguese government at risk of collapsing after Foreign Minister resigns

UPDATE (18:15) - We thought it would be useful to explain quickly how things work in Portugal when a government crisis occurs. If the Prime Minister resigns, the Portuguese President is the one who decides when and if parliament has to be dissolved.

Under Portugal's electoral law, new elections must be held at least 55 days after parliament is dissolved. This would mean almost two months with a caretaker government at a rather unfortunate time for Portugal. 

ORIGINAL BLOG POST (17:45)

One day after the resignation of Finance Minister Vítor Gaspar, the Portuguese government has just lost another one of its key players. But the impact could be a lot bigger this time.

Paulo Portas, the country's Foreign Minister (see picture), has resigned because he disagreed with the appointment of Maria Luís Albuquerque as new Finance Minister.

Portas is also the leader of the People's Party (CDS-PP), the junior coalition partner of Prime Minister Pedro Passos Coelho. If the party pulls out of the coalition (which looks likely in light of Portas's resignation) Passos Coelho will lose his majority in parliament. So this is critical as it can potentially trigger new elections. 

Passos Coelho will make a TV statement tonight. We'll keep you posted. In the meantime, it's worth keeping in mind the economic and social challenges Portugal faces - which we outlined here.

Portugal's Finance Minister quits: A bolt out of the blue? Not really...

A surprise development in Portugal this afternoon, as Finance Minister Vítor Gaspar has announced his resignation. The office of Portuguese President Aníbal Cavaco Silva has said in a note that Gaspar will be replaced by Maria Luís Albuquerque - one of his deputies, with a long career in the Portuguese Treasury.  

Initially, the news sounded very much as a bolt out of the blue. That was until Jornal de Negócios published Gaspar's letter of resignation on its website. The letter reveals the following:

• Gaspar had already written to Portuguese Prime Minister Pedro Passos-Coelho in October 2012, stressing "the urgency of [his] replacement as Finance Minister."

• At the time, Gaspar had decided to quit over "a series of important events". In particular, he mentions the Constitutional Court ruling that struck down the government's plan to limit extra holiday and Christmas pay for public sector workers as unconstitutional in July 2012, and "the significant erosion of public support" for the austerity measures attached to the Portuguese bailout.

• However, Gaspar was asked to stick around a bit more - at least until the 7th review of the Portuguese bailout by the EU/IMF/ECB Troika was finalised and an extension of the bailout loan maturities was secured. Incidentally, the fact he has now been allowed to leave could be seen as a vote of confidence from the government in the strength of the Portuguese economy (although Gaspar may simply have been stepping up the pressure to be allowed to exit).

• Gaspar also points out that Portugal's consistent failure to meet its deficit and debt targets under the EU/IMF bailout agreement had "undermined [his] credibility as Finance Minister." On this point, it is probably worth reminding that, on Friday, it came out that Portugal's public deficit in the first quarter of 2013 had reached 10.6% of GDP - with the target for this year set at 5.5% of GDP.

• Interestingly, Gaspar concludes his letter by saying, "It's my firm conviction that my exit will contribute to reinforce your [Prime Minister Passos-Coelho's] leadership and the cohesion of the cabinet". This seems to suggest Gaspar may have lost faith in the reform approach taken in Portugal, and may not have been willing to push ahead with it (not least for the reasons mentioned above).

In any case, the news of Gaspar's resignation hardly comes at a great time for Portugal. As we noted in a recent briefing, the country faces some tough challenges this year:

• Domestic demand, government spending and investment are contracting sharply, leaving the country heavily reliant on uncertain export growth to drive the economy. 

• By cutting wages and costs at home (internal devaluation), Portugal has in recent years improved its level of competitiveness in the eurozone relative to Germany. However, this trend actually started to reverse sharply in 2012, meaning that the divergence between countries such as Portugal and Germany has begun growing again – exactly the sort of imbalance the eurozone is seeking to close. 

• In its austerity efforts, Portugal is now coming up against serious political and constitutional limits. For the second time, the country’s constitutional court has ruled against public sector wage cuts – a key plank in the country’s EU-mandated austerity plan – while the previous political consensus in the parliament for austerity has evaporated. 

How much impact this will have remains to be seen, although in a country where the economic future remains uncertain, suprises such as this are hardly ever welcome. In practice, though, the approach is likely to continue in much the same vein, firstly because the EU/IMF/ECB Troika has shown little willingness to be flexible with Portugal, and secondly because Maria Luís Albuquerque has often voiced her support for the approach taken so far.

That said, it is an interesting reminder of the strains the bailout programme is putting on the Portuguese government, as it begins the difficult task of finding a way to smoothly exit from its reliance on external funding.

The 'forgotten man' of the euro crisis catches a break...

While everyone is gearing up for the EU's 'Super Wednesday', Portuguese Finance Minister Vítor Gaspar has made a quite important announcement. As we anticipated in our daily press summary more than two weeks ago, following its fifth monitoring mission to Lisbon, the EU-IMF-ECB Troika has decided to give Portugal one extra year to make the budget cuts agreed under its bailout programme.

The 'forgotten man' of the euro crisis will therefore be allowed to close the year with a deficit of 5% of GDP (instead of the previously agreed 4.5%). Portugal will then have to cut its deficit down to 4.5% of GDP (instead of 3%) next year and to 2.5% of GDP in 2014. No doubt the one off transfers from pension funds to push the deficit below previous targets finally caught up with them. 

The news is particularly interesting - and not only because Portugal seems to have fairly easily achieved what Greece has failed to obtain so far, despite Greek Prime Minister Antonis Samaras's recent 'diplomatic offensive'. In fact, Portugal is still expected to return to the markets in September 2013 (exactly one year from now). Given that the country has been allowed to run a larger deficit for this and next year, this suggests that it will have to borrow more money to cover for it.

For the moment, Gaspar has made clear that nothing has changed on that front, and Portugal will try to raise the money from private lenders (i.e. will not ask the EU and the IMF for more cash).

However, this brings us on to another interesting fallout from the ECB's new Outright Monetary Transactions (OMTs). Since currently bailed out countries, such as Portugal, can access support from the ECB when they are due to return to the markets, there is a good chance that the ECB could buy up some existing Portuguese debt from the secondary markets in September 2013, allowing banks to reinvest this money in the  new debt Portugal will issue. This also allows Portugal (and the eurozone) to sidestep the IMF's demand that countries be able to show clear funding streams for 12 months (which led to the second Greek bailout request).

So, despite delaying its deficit target and not being guaranteed market access within twelve months, Portugal looks able to avoid a second bailout with the help of the ECB (at least for the moment). One should now only ask whether the conditions attached to the Portuguese bailout programme will satisfy the ECB, especially after they have been eased...