Portugal's President May Call June Elections With Bond Redemptions Looming
Portuguese President Anibal Cavaco Silva may call early elections for June, close to the date of a key bond redemption that may determine whether Portugal seeks an international rescue.
Cavaco Silva needs to schedule a vote after Prime Minister Jose Socrates resigned on March 23 following opposition parties’ rejection of budget cuts aimed at reducing the deficit and staving off a European Union-led bailout. The president met with all parties on March 25 and was urged to call the ballot, more than two years before the legislature’s term ends.
Portugal doesn’t need a rescue, Socrates said at a summit of EU leaders in Brussels on March 25, seeking to counter speculation that the country’s record bond yields will force it to follow Ireland and Greece in seeking aid. The nation faces bond redemptions of about 9 billion euros ($12.8 billion) on April 15 and June 15.
“We think that Portugal has sufficient funds to cover the April redemption of 4.5 billion euros, though further funding would be required for the June 4.9 billion-euro redemption,” said analysts including Guy Mandy at Nomura Holdings Inc. in a note to investors on March 25.
Under Portuguese law, the elections may be held no sooner than 55 days after being called. Parliamentarians from Socrates’ Socialist Party, the Green Party and the Communist Party suggested that Cavaco Silva call the elections for early June. The People’s Party asked for polls as soon as possible and the Social Democrats’ Pedro Passos Coelho said they should take place at the end of May.
“Portugal’s three largest parties guaranteed to the president their unequivocal commitment to a strategy of budget consolidation and the targets of deficit reduction announced by the Portuguese state to guarantee the path of sustainability of public debt,” Cavaco Silva said in a written response to e- mailed questions. The three biggest parties are the Socialists, the Social Democrats and the People’s Party.
Socrates’s resignation cast a shadow over the EU summit that began the next day and that aimed to stop the spread of the debt crisis and spare further bailouts through a package of measures, including establishing a permanent-rescue fund.
“The opposition parties decided to start a political crisis at the worst moment for Portugal,” Socrates said at a Socialist Party meeting yesterday. “Resorting to external aid would be bad for Europe, it would be bad for the single currency and it would be bad for many other European countries that are expecting Portugal to fight for that not to happen.”
Portugal’s 10-year bond yield advanced to a euro-era record of as much as 7.94 percent today. The difference in yield that investors demand to hold the securities instead of German bunds was at 463 basis points today, after reaching the most since November on March 25. The Portuguese five-year yield also rose to a record 8.707 percent, indicating investors perceive more risk to lend to Portugal for five years than for 10.
Standard & Poor’s said it may downgrade Portugal’s debt again this week after cutting long- and short-term counterparty credit ratings today on five Portuguese banks and two related subsidiaries. S&P cut Portugal’s rating two notches on March 25, to BBB from A-.
A bailout may total as much as 70 billion euros, said two European officials with direct knowledge of the matter. Analyst Laurent Fransolet at Barclays Capital estimated in a note on March 25 that the country’s current cash position was likely to be about 4.5 billion euros to 5 billion euros, enough to cover the April redemption, though not the one in June. Debt agency chairman Alberto Soares wasn’t immediately available to comment.
“Portugal needs to find financing in the coming weeks,” Fransolet wrote, adding that funds could come through issuance, credit lines or a bridge loan. “Portugal is likely to find financing, but it is not in a comfortable position.”
The president must also consult with the Council of State, an advisory body including past premiers and presidents, before he can accept the resignation of Socrates, who was re-elected as his party’s leader over the weekend. Cavaco Silva will meet with the council on March 31 at 3 p.m., his office said today in a statement on its website.
Socrates, who first came to power in 2005, leads a minority government. The Social Democrats, the biggest opposition group, allowed the government’s earlier austerity measures to pass with this year’s budget. They say they still back efforts to reduce the budget gap to 4.6 percent of gross domestic product in 2011 and 3 percent next year.
“In what concerns the Portuguese state’s external commitments, namely redemptions and public debt payments, they are usual acts of governments and I’m absolutely sure that the caretaker government will assure those functions,” Passos Coelho said after meeting with the president.
Portugal has already raised taxes and implemented the deepest spending cuts in more than three decades to convince investors it can reduce its budget shortfall. The additional cuts, announced on March 11, were the equivalent of 4.5 percent of GDP over three years and prompted a political backlash.
The Social Democrats led the Socialists in a survey of voters’ intentions for parliamentary elections, television station TVI reported on its website today. The poll gave the Social Democrats 42.2 percent, compared with 41.6 percent in December, TVI said. The party would still lack a majority in parliament based on the projection.
The survey indicated 32.8 percent support for the Socialists, compared with 30.1 percent in December, according to TVI. About 61 percent of those polled favored a coalition government, TVI said.
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