Portugal: Political crisis and next steps
Following the resignation of influential FM Vitor Gaspar and the appointment as new FM of Secretary of State for the Treasury Maria Luis Albuquerque, the leader of the junior government coalition party (and also foreign affairs minister), Paulo Portas, has presented his ‘irrevocable’ resignation to the PM. Portas expressed his deep discontent with the appointment of Alburquerque as, in his view, a continuation of the failed austerity policies championed by Vitor Gaspar.
Reacting to these events, PM Passos Coelho (leader of PSD) said in a televised speech that he does not intend to step down and demanded support from the rest of the CDS party in maintaining the PSD/CDS coalition government.
However, the leader of the main opposition party (PS), socialist Antonio Jose Seguro, said there is no alternative to this crisis other than early general elections. He stated that the country needs a new government with strong legitimacy which can only be obtained through early elections. The socialist leader is meeting the president of Portugal today at 16:30, presumably to discuss these issues.
Our views
CDS support is critical to government stability and continuation. Without the support of CDS, which has 24 seats in the parliament, the PSD (108 seats) lacks the majority to guarantee stability in the 230 seat parliament. The left-wing opposition forces have the remaining 98 seats: PS has 74 seats; PCP-PEV 16 seats and BE 8 seats. The CDS is having its annual party congress this weekend and it is likely that a decision on the government support will be taken by that time at the latest.
We see early elections as the most likely outcome at this stage, even if we cannot fully rule out support from some CDS MPs and the continuation of the government. We consider that the decision of the CDS leader to step down from the government can be explained to a large extent by the fall in popular support for the government coalition. In particular, according to a poll published on 10 May 2013 by local newspaper Expresso, the main opposition party (the socialist PS) is leading the polls with 36.0% of the intended vote, while the conservative PSD would take 25.9% of the vote. The CDS would fall from third place in the last general election to fifth, with only 8.4% of the vote (ie, it is in the last position among those parties which would get parliamentary representation). In sum, we think stopping the vote haemorrhage seems to be a key factor behind the decision of the CDS leader to step down. Indeed, if early general elections were to be called we would not rule out a potential government coalition (post election) of CDS with the socialist PS, which is leading the polls and has called for early elections.
We think the market impact of this political crisis is likely to be very significant for Portugal but less so for other periphery countries. We think the decision of the CDS leader to step down is likely to trigger a sell-off in the Portuguese bond markets. However, we do not anticipate the decision being a critical event for the rest of the euro area, for at least two reasons.
First, even if the ‘troika’ programme stalls and there are delays in upcoming disbursements (the eighth programme review was about to start), there are no immediate large cash needs for the Portuguese Treasury, which has sufficient liquidity to meet the large bond payments (EUR9.7bn) coming due in September 2013, and there are no other large payments coming due in the rest of the year.
Second, even if early elections are called – for example, in Fall 2013 (there are local elections scheduled for end September 2013) – the polls signal a likely victory for the socialists (which might require the support of CDS to obtain an absolute majority). While it is still too early to attach a probability to this event, we would not see such an outcome as dramatic. While such an outcome might steer the country toward more pro-growth policies and a further relaxation of fiscal targets (which had already been relaxed in the 7th programme review), we do not believe it would represent a radical change in the course of the ‘troika’ programme (ie, they are still moderate parties). Recall that the socialists and CDS both signed the MoU with the ‘troika’ in 2011.
Nonetheless this government crisis evidently reflects reform fatigue and a rejection of a focus on austerity measures. Portugal has so far achieved about two-thirds of the more than 10 percentage points of GDP of fiscal consolidation required under the troika programme to put the public debt dynamics on a downward sloping path. Under the programme, public debt is estimated to peak at slightly over 124% of GDP by 2014. But in our view, public debt is more likely to reach nearly 134% of GDP by 2015 under the current government programme . Given the ongoing political events, the risks are evidently to the downside, not only because of further relaxation of fiscal targets (and the unfavourable April constitutional court ruling), but also as a result of plausible negative shocks to the envisaged growth path, the possibility of the government having to absorb further off-balance-sheet SOE contingent liabilities, and additional bank recapitalization costs.
Needless to say, it will likely now be even more challenging for Portugal to regain full market access this year. Portuguese sovereign bonds have already experienced a significant sell-off as investors recently switched to a risk-off mode and riskier assets (including Portuguese bonds) have staged a weaker performance. Yet the government and the troika have logically been pressing for early market access, mainly because the longer Portugal remains under official funding then the larger is the share of ‘senior debt’ in the total stock of public debt, which tends to diminish private investor appetite for Portuguese bonds. As we have argued in the past (and even moreso under current circumstances), if the government were to achieve full market access by mid 2014 (scheduled end of current programme), we would consider it a rather positive outcome.
Barclays