Coalition crisis brings Portugal back to center-stage in eurozone bailouts saga

Cavaco Silva

Until today, Portgual’s beleaguered government looked like it would avoid crisis — just barely.portugal flag

But the decision by Portugal’s president to seek a broad unity government to carry out the terms of Portugal’s bailout program has cast doubt again on whether the center-right government led by Pedro Passos Coelho will be able to serve through the end of its natural term of government in 2015 or at least long enough to see through the termination of the €78 billion bailout program in June 2014.

Despite a deal last week that saw Passos Coelho’s more conservative coalition partners agree to return to government, Portuguese president Aníbal Cavaco Silva, who served as prime minister of Portugal from 1985 to 1995, is now pushing for a broader coalition in light of risks that the government might falter again.  Cavaco Silva’s top priority is that Portugal has a reliably strong government to see through the bailout program next year and to avoid snap elections now in favor of early elections sometime next June.

But that appears to have backfired, and it remains unclear just what will happen next in Portugal’s governing crisis — Cavaco Silva’s ploy may have made early elections even likelier, which are certain to become a referendum on further austerity measures in accordance with Portugal’s bailout.  The political crisis comes at a time when Lisbon was set to host International Monetary Fund and European Union officials next Monday for a review of the bailout program and amid reports that Portugal will require a second bailout when the current one runs out next year.

Portugal’s most recent crisis began when finance minister Vítor Gaspar resigned on July 1 after rising complaints over the implementation of the bailout program.  Gaspar, a technocratic economist first appointed after the June 2011 elections that swept Passos Coelho and his center-right Partido Social Democrata (PSD, Social Democratic Party) into power.  He had become the poster child for austerity and widely reviled as Passos Coelho’s party has fallen up to 10 points behind the main center-left opposition, the Partido Socialista (PS, Socialist Party) in polls.

Passos Coelho immediately appointed treasury secretary Maria Luís de Albuquerque as Gaspar’s replacement, but the following day, his foreign minister Paulo Portas resigned.  Portas, also the leader of his more socially conservative coalition partner, the Centro Democrático e Social – Partido Popular (CDS-PP, Democratic and Social Center — People’s Party), indicated that he would pull his party’s support from the coalition in opposition to the new finance minister’s appointment, arguing that it marked a continuity of policy with which Portas and his party now disagreed.

Nonetheless, a weekend deal between Passos Coelho and Portas appeared to have healed the rift — Portas would become deputy prime minister and take a larger role in steering the country’s finances, though de Albuquerque would remain as the new finance minister.  Though the deal required Cavaco Silva’s approval, it seemed likely to win it this week, given that Cavaco Silva (pictured above) had been crucial in bringing Passos Coelho and Portas back together.

Instead, Cavaco Silva’s call for a unity government to include the Socialist Party as well has renewed the Portuguese political crisis, given that the Socialists and their new leader, António José Segurocontinue to push for early elections rather than join a unity government.

Though Portuguese 10-year bond yields have fallen from a recent July 3 high of 7.47%, they edged up to a still-worrying 6.77% today after Cavaco Silva’s gambit.

While Cavaco Silva may have failed, his logic isn’t unreasonable.  Cavaco Silva’s goal was to steer Portugal between what he viewed as two poor alternatives — one in which he’ll have to trust  Portas and the conservative Christian Democrats to see through the bailout program, and another in which Portugal faces snap elections that could result in a hung parliament (or worse, if the two major leftist blocs outperform already robust expectations).

Portas has already shown himself to be a less than reliable ally in government, and it seems clear that Cavaco Silva doesn’t trust Portas to stay the course through the end of the 2014 bailout program.  With Portas taking a greater role in bailout negotiations, he may push for even more relaxed deficit targets, thereby endangering the completion of the country’s bailout.

A former media muckraker who spent much of the 1980s attacking Cavaco Silva’s center-right government, Portas came to politics in 1998 when he engineered a takeover of the Christian Democrats, and he’s led the small party ever since.  He first served in government as defense minister from 2002 to 2005 in a previous center-right coalition, when he courted controversy in supporting the purchase of costly submarines for Portugal’s armed forces.  After the 2011 elections, when Portas led the Christian Democrats to their best-ever result of 24 deputies, he became foreign minister in the current government, though he’s distanced himself from the government’s unpopular austerity measures.

Moreover, though the Socialists are riding high in polls today largely as a result of the government’s unpopularity, it was former Socialist prime minister José Sócrates who led the initial push for the country’s bailout, meaning that both major parties are already tainted with having supported the painful bailout and its accompanying terms.  That means that while the Socialists seem likely to win the next election, they may not win enough support to form a government as support for two minor leftist blocs have increased.  The Coligação Democrática Unitária (Democratic Unity Coalition), a coalition of Portuguese communists and greens, holds 16 seats and won 8% of the vote in 2011, but are polling at around 12% or 13% today.  The Bloco de Esquerda (Left Bloc), which holds eight seats after winning 5% in 2011, is now polling between 8% and 9%.

That could lead to a scenario similar to those in Greece, where May 2012 elections were inconclusive and led to a second set of elections in June 2012, or in Italy, where anti-austerity candidates gained enough support to bring the country’s government into paralysis.  The comparison to Italy, in particular, may be most prescient.

While Seguro has taken an overall anti-austerity stance, and he’s called for a renegotiation to lighten the conditions of the Portuguese bailout,  he’s also provided key support to Passos Coehlo’s government.  That means Seguro’s message has been somewhat muddled, and he’s seen as a less capable leader than António Costa, a longtime Socialist minister who left national government in 2007 to become Lisbon’s mayor.  In many ways, Seguro’s situation mirrors that of Pier Luigi Bersani, the former center-left leader of Italy, who frittered away a double-digit lead in polls in advance of Italian elections in February 2013.  Costa, meanwhile, has championed a younger, more dynamic ‘third way’ role, much in the same way that Florence mayor Matteo Renzi challenged Bersani and the old guard of the Italian left.

Passos Coehlo’s government, in office for just 24 months, has pushed through tax increases and budget cuts to bring Portugal’s budget deficit from a high of 9.4% of GDP to a goal of 3% by 2015.

That’s proven difficult as Portugal’s economic performance has wilted.  Despite 1.4% growth in 2010, the economy collapsed into recession in 2011 with a 1.7% decline in GDP, followed by an estimated 3% contraction in 2012 and an estimate of 3% contraction again this year.  Cuts to government programs have slimmed down the country’s budget but have also weakened the economy, launching Portugal into a nasty cycle — as economic performance worsens, the government must make more budget cuts or tax increases to maintain its deficit targets, which thereupon have further weakened the economy.  With Portuguese public debt having increased from around 90% of GDP to around 120% today, the country remains one of the most indebted within the European Union, despite the fact that Passos Coehlo and Gaspar cut the deficit to just 4.5% in 2011 and around 6.5% in 2012.  Though the 2012 deficit didn’t meet the 5% target that the International Monetary Fund and its European Union counterparts had set, Portugal’s lenders have cut its government some slack in light of ongoing economic difficulties.  But as both Portugal’s economy and political leadership continue to sputter, it seems increasingly likely that Portugal will require some form of debt relief more than it needs another bailout loan program.

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