Overview : Portugal: Political Stability At Risk

In Portugal, months of latent political tensions finally broke out into a crisis. Over a 2-day period, first Vitor Gaspar, the Finance Minister, and then Paulo Portas, the Foreign Affairs Minister and head of the ruling coalition’s junior party, the CDS-PP, presented their resignations. The two decisions were linked and illustrate the deepfelt divisions within the government concerning the adjustment plan. Mr. Gaspar claims he resigned for lack of sufficient public support and the repeated budget overruns that had tarnished his credibility. Actually, his resignation is due more to growing disagreements between coalition parties over the policy to follow. Since September 2012, relations have become strained between the PSD, the centreright majority party in which Mr. Gaspar is a member, and the CDSPP, its conservative ally, increasingly critic about austerity policy. As the orchestrator of the Troika’s adjustment programme, Mr. Gaspar’s resignation seemed to respond to CDS-PP demands for a more flexible budget policy. In contrast, his replacement by Maria Luis de Albuquerque, former acting minister, is a sign of continuity. Indeed, this is the reason Mr. Portas gave to justify his resignation that very day.

The big question now is whether Mr. Portas resignation will be followed by the CDS-PP’s exit from the government, and whether early elections will be called. A priori, it is not in the interest of the CDS-PP to remain a member of an unpopular government in which it cannot control the main policy orientations, nor to trigger early elections, which risk sanctioning its loss of political influence. In the latest polls, the conservative party is given less than 10% of voting intentions, vs. 12% of votes received in June 2011. The CDS-PP might decide to leave the government, leaving the PSD with a relative majority (108 deputies out of a total of 230), but would continue to provide support in parliament on a case-by-case basis.

Another option is that the two remaining CDS-PP ministers in the government could agree to stay onboard in exchange for an easing of austerity. Yet any such arrangement is bound to be limited by the restrictions imposed by the Troika’s adjustment programme. On two occasions, Portugal’s budget targets have been relaxed, largely thanks to the authorities’ credibility, which arises from its political stability. During the Troika’s 8th review beginning on 15 July, it will surely be much harder to negotiate another easing of terms.

With little manoeuvring room, a PSD government would probably be too weak to meet the upcoming deadlines (the 8th Troika review, local elections in September and preparation of the 2014 budget) while assuring the political alliances necessary to remain in power. Moreover, it will take a stable and legitimate government to negotiate a new European financial aid package (an ESM precautionary credit line), which will probably be needed to facilitate the exit from the adjustment programme in mid 2014. Without the ongoing support of the CDS-PP, the PSD has very little chances of winning a parliamentary vote of confidence. In other words, early elections may well occur before the end of its current mandate, scheduled to end in late 2015.

This political crisis comes on top of the economic crisis, which is largely its cause. Failure to meet initial budget targets and a much stronger-than-expected increase in the unemployment rate (to nearly 18%) fuelled the notion that the adjustment programme was a failure, despite the quarterly satisfecits of international creditors. Renewed bond market tensions following the double resignation (see chart) might not last long if a sustainable political solution can be found. If not, some of the positive signals that nonetheless seem to be taking shape on the horizon could be erased. Portugal’s recent return to the long-term bond markets, a significantly milder recession in Q1 2013 and the gradual upturn in confidence all raise hopes that economic activity could level off by the end of the year, before the structural reforms set up since 2011 begin to pay off. In a recent report, the OECD estimated that Portugal’s growth potential, currently estimated at 0.5%, could be lifted to 3.5% by 2020.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

In a sense, Portugal’s current situation is typical of the troubles facing the peripheral countries under adjustment programmes. The mismatch between the time necessary for reforms to bear fruit, their often negative short-term effects and the tight political agenda is a source of instability. In Portugal, there was a strong political consensus around the adjustment programme until September 2012, but now austerity fatigue has won the upper hand. This is bound to affect the quality of discussions with the Troika, but a radical change in economic policy seems very unlikely. Even if early elections were called, the main Republican parties would first be asked to officially commit to respecting the programme’s conditions in order to continue receiving financial support. This was already the case in June 2011 when Mr. Socrates, the former Socialist prime minister, resigned after requesting European assistance, which triggered early elections.

BY Thibault MERCIER

Written By: BNP Paribas