Portugal Holds Crisis Talks as President Moves to Call Vote
Portuguese President Anibal Cavaco Silva
Patricia de Melo Moreira/AFP/Getty Images
Portuguese President Anibal Cavaco Silva.
Portuguese President Anibal Cavaco Silva. Photographer: Patricia de Melo Moreira/AFP/Getty Images
Portuguese President Anibal Cavaco Silva is consulting former leaders, the last hurdle to calling early elections, as he seeks to end a political impasse that has raised borrowing costs and prospects for a bailout.
Prime Minister Jose Socrates resigned on March 23 after opposition parties rejected his deficit-cutting plan that aimed to prevent Portugal from following Greece and Ireland in seeking a European Union rescue. Cavaco Silva began meeting in Lisbon today with the Council of State, an advisory body including past presidents that must be consulted to set the date of the vote.
Portugal is already raising taxes and implementing the deepest spending cuts in more than three decades as it tries to narrow its budget gap, curb debt and bring down record financing costs. Under Portuguese law the election can’t be held before the last week of May, meaning it will likely fall between two bond redemptions Portugal faces on April 15 and June 15 that total 9 billion euros ($13 billion).
“At this stage it makes sense for Portugal to go” into the European Financial Stability Facility and “take up official loans in order to refinance its upcoming maturities,” Andrew Bosomworth, a money manager at Pacific Investment Management Co., said in a March 29 interview with Francine Lacqua on Bloomberg Television’s “On The Move,” referring to the EU’s bailout mechanism.
Deficit Release
The president’s consultations began hours after Portugal reported a budget deficit of 8.6 percent of gross domestic product for 2010, higher than the 7.3 percent gap the government had previously forecast. Eurostat, the EU’s statistics office, has required “methodological changes” in some countries and costs related to a 2008 bank failure were added to last year’s accounts, Finance Minister Fernando Teixeira dos Santos said.
Portugal’s two-year government bond yield climbed to 8.15 percent, topping the rate on the nation’s 10-year debt for the first time since 2006. The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds reached a euro-era record of 500 basis points. The 10-year bond yield rose to a euro-era record of 8.370 percent, and the five- year bond yield also jumped to a record 9.597 percent.
Downgrades
Standard & Poor’s on March 29 downgraded Portugal for the second time in a week to BBB-, the lowest investment grade, saying the country will “likely access” Europe’s rescue fund. Portugal is rated lower than Ireland, which in November became the first to request aid from the European Financial Stability Facility, set up after Greece’s rescue in April 2010.
Portugal’s current government doesn’t have the power to request a bailout afterSocrates resigned last week, Teixeira dos Santos said today. “The government is not in conditions and does not have the powers to request any type of external aid,” he said. “The government will guarantee that there is the necessary financing for the country to face its responsibilities and honor its commitments.”
Dutch Finance Minister Jan Kees de Jager today said Portugal has to make “the first step” if it decides it needs aid and has to “outperform” market expectations regarding its ability to put public finances back on a solid footing.
Portugal can meet “debt redemption commitments scheduled for 2011, especially the redemptions of long-term debt that will take place in April and June,” Secretary of State for Treasury and Finance Carlos Costa Pina said earlier this week.
Debt Sales
Alberto Soares, head of Portugal’s debt agency, said on March 29 that it had already carried out 36 percent of this year’s estimated issuance of medium and long-term debt. Portugal intends to sell as much as 20 billion euros of bonds this year to finance its budget and cover maturing debt.
Bond issuance in the second quarter “will be subject to market conditions, either through regular or extraordinary auctions,” government debt agency IGCP said today on its website. It announced plans to carry out bill auctions in April, May and June.
Costa Pina said elections could help Portugal’s borrowing costs. “The cost of financing was substantially worsened by the political crisis triggered by the opposition,” he said. “A clarification of the political situation is urgent.”
Setting Date
Under Portuguese law, the elections may be held no sooner than 55 days after being called, meaning the soonest the ballot could take place would be the final week of May, more than two years early.
Opinion polls indicate that Socrates, who will lead the Socialists in the next vote, will lose the election. The Social Democrats led the Socialists by 42.2 percent to 32.8 percent in a survey of voters’ by television station TVI, reported on its website on March 27. The party would still lack a majority in parliament based on the projection.
Socrates became prime minister in 2005 and his Socialist Party won re-election in 2009 without a majority in parliament. The Social Democrats agreed in October to let the government’s 2011 budget proposal pass by abstaining in parliament. Their opposition to the new austerity measures announced on March 11, which included a reduction in some pensions and cuts in tax benefits, was key to toppling Socrates.
Deficit Goals
Cavaco Silva on March 28 said the country’s three biggest political parties pledged their commitment to meet the current deficit targets. The government set a goal for a deficit of 4.6 percent of GDP in 2011, and aims to reach the EU limit of 3 percent in 2012.
It forecasts debt of 87.9 percent of GDP this year and 88.1 percent in 2012 from 82.4 percent last year. That ratio will start falling in 2013.
Achieving the economic growth needed to bring the debt back to pre-crisis levels may prove difficult given the country’s track record. Portugal’s economic growth has averaged less than 1 percent a year in the past decade, one of Europe’s weakest growth rates. Portugal’s unemployment rose to 11.1 percent in the fourth quarter, the highest since at least 1998, as the economy contracted for the first time in a year.
Standard & Poor’s left its outlook on Portugal negative after its March 29 rating cut, saying that the deficit and debt goals might prove unachievable.
“The negative outlook reflects our view that the macroeconomic environment could weaken beyond our current expectations and that a political impasse could undermine the effective implementation of Portugal’s adjustment program, leading to non-negligible policy slippages,” S&P said in an e- mailed statement.
To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net.
To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net.
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