«NO ONE is likely to emerge a winner from the political disarray triggered in Portugal by the resignations of the finance and foreign ministers. For two years the country has won plaudits as the best behaved of peripheral Europe’s bailed-out countries. But voters have tired of the relentless austerity that Portugal has had to endure under the terms of its €78 billion ($101 billion) bail-out programme, and the repercussions appear to have split the two-party coalition government. Portugal’s international creditors, the “troika” of the EU, the IMF and the European Central Bank, are seeing their star pupil brought low by the political and social costs of implementing their rescue plan.
The electoral future of the prime minister, Pedro Passos Coelho, and the two governing parties looks bleak. If the crisis were to bring the opposition Socialists (PS) to power, as many expect, few believe they would have any more leeway to fulfil their promises of easing austerity than today’s or any other government. Most important for Portuguese voters, the hardship they have undergone on the promise that this would see their country through its debt crisis could be prolonged. The political turmoil in Lisbon increases the odds that Portugal will be unable to regain full access to capital markets by the scheduled date of June 2014. And that would make a second bail-out likely.
Share prices tumbled and bond yields soared this week, briefly surpassing 8%, amid fears that the government was about to collapse. Although Portugal has already achieved about two-thirds of the fiscal consolidation required under its three-year bail-out programme, Barclays Research still expects its public debt to peak at nearly 134% of national output, raising doubts over the prospects of lifting the economy out of a deep recession and hence over the sustainability of the fiscal measures.
Mr Passos Coelho’s government began to unravel on July 1st when Vítor Gaspar resigned as finance minister. In a candid letter the former Brussels technocrat acknowledged that his credibility had been undermined by a much sharper fall in domestic demand and lower tax revenues than he had expected, as well as a failure to meet fiscal targets. He also cited a loss of public support for his austerity policies and a lack of political backing within the government.
The prime minister moved quickly, promoting Maria Luís Albuquerque from treasury secretary to replace Mr Gaspar, in a signal to international creditors that Portugal would not relax its commitment to balancing the books. As dignitaries and journalists gathered on July 2nd for the swearing in of the new finance minister by Aníbal Cavaco Silva, the president, the news broke that Paulo Portas had resigned as foreign minister in disagreement with the appointment.
Mr Portas is leader of the conservative People’s Party (CDS-PP), the junior partner in the two-party government coalition. His resignation therefore threatened the government with imminent collapse. In an unexpected turn of events, the prime minister appeared on television that night, not to announce his own resignation, as many had predicted, but to say that he had refused to accept Mr Portas’s, even though the outgoing minister had described his decision as “irreversible”.
The dust may not settle for some time as Mr Cavaco Silva consults political leaders in a search for the least damaging exit to the crisis. The coalition between the CDS-PP and Mr Passos Coelho’s centre-right Social Democrats (PSD) appears deeply split although the two parties are trying to patch up their differences.
A snap election two years ahead of schedule may prove the only choice. This is the solution being argued for by the PS, which requested Portugal’s bail-out in May 2011, before losing a general election the following month. The PS is ahead in opinion polls with about 36% of the vote, against 26% for the PSD.
Before he resigned, Mr Portas had urged the prime minister to use Mr Gaspar’s exit as an opportunity for a broader cabinet reshuffle and to move the focus of policy away from austerity to growth. Yet can any Portuguese government shift away from austerity? “People in government and the opposition talk about austerity and the bail-out without really addressing the alternatives,” says Pedro Santa-Clara of Universidade Nova in Lisbon. “The only real alternatives are to co-operate with your creditors or to default. The fact that something is painful does not mean that the alternative is not even more painful.”»
On the rocks - The Portuguese government seems close to colapse, Economist
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