I covered throughout 2012 and into the beginning of this year that Portugal was a nation that looked to have deteriorating economic fortunes even though it had originally been heralded by the EU as an “austerity success story”. I noted earlier in the year that failing economic activity, and therefore government revenues, was being met with what appeared to be self-defeating economic policy which, in the absence of some renewed external demand, was likely to drag the economy further into recession.
On top of the fact that these policies appeared self-defeating, back in April the Portuguese constitutional court struck down parts of the government’s plan making it even more difficult for them to provide a credible path to the troika as to how they were going reach promised targets by 2014 given previous slippages. As in a number of other European nations under pressure to implement near impossible targets based on misguided ideology and rubbery figures, it was quite likely that the “worse then expected” economic outcomes were going to produce some form of political crisis. That has now occurred.
The resignation in quick succession of two of Portugal’s biggest political beasts has left many questioning whether the right-of-centre government, which has enthusiastically embraced austerity measures, can survive much longer.
In a statement to the nation on Tuesday night, Prime Minister Pedro Passos Coelho pledged to stay the course, saying the country desperately needed political stability in the current economic crisis.
He said it would be “hasty” to accept the resignation tendered hours earlier by Foreign Minister Paulo Portas, who also leads the junior partner in the two-party governing coalition, and that he had therefore not asked the country’s president to relieve Mr Portas of his duties.
But Portuguese political commentators expressed scepticism that Mr Portas might go back on a decision that he described in his resignation statement as “irrevocable”.
He also said it was one of conscience, resulting from the fact that he had argued against the prime minister’s choice of new finance minister but his advice was not taken.
Mr Portas announced his resignation minutes before Maria Luis Albuquerque was formally appointed finance minister to replace Vítor Gaspar.
Mr Gaspar resigned on Monday citing:
“significant erosion” in public support for the policies he believed were necessary to clean up Portuguese state finances
the Constitutional Court’s rulings against parts of two successive annual state budgets, and
Portugal’s failure for two years running to hit the budget deficit targets originally set by officials overseeing its eurozone bailout.
These factors, he said, meant he lacked the authority to stay on.
Paulo Portas is the head the small CDS-PP party which provides the government’s majority in the parliament. His resignation, if finalised, is likely to bring down the government as the Opposition demands new elections. The country’s President has called a meeting with all parties in order to attempt to find a resolution, but there are reports that other members of the CDS-PP party are considering resigning also which is likely to trigger a dissolving of parliament by the President after a no-confidence vote by the Opposition.
On top of the already poor economic data, this political crisis puts into doubt Portugal’s ability to regain market access by next year. That being the case the country may require another bailout package which, as we have seen in Greece and Cyprus, could possibly have some far stricter criteria in the form of private/official sector write-downs.
It’s obviously early days, but this is definitely a story to watch. Markets have taken the news poorly with the Portuguese 10 year bonds yield jumping over 150bps to be 8.02%, the highest since November, while the Portuguese stock market also saw significant losses.
In other news out the Eurozone the composite and services PMI data for June was released overnight. Overall its was a similar story to manufacturing data, with a broad easing of rate of contraction with the exception of Italy. However, as I said on Tuesday, although the data, outside of employment, is looking better there is a long way to go because …
… there are many risks still evident, as improvements in the export sector and the expense of internal demand risks flaring up new issues in the banking sector and the broader economy.
Portugal is case in point.
Full Composite PMI report for June below.