Portugal’s Coelho Won’t Resign After Foreign Minister Quits

Photographer: Mario Proenca/Bloomberg

Portuguese Prime Minister Pedro Passos Coelho stands during a swearing in ceremony for new government ministers in Lisbon. Close

Portuguese Prime Minister Pedro Passos Coelho stands during a swearing in ceremony for... Read More

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Photographer: Mario Proenca/Bloomberg

Portuguese Prime Minister Pedro Passos Coelho stands during a swearing in ceremony for new government ministers in Lisbon.

Portuguese Prime Minister Pedro Passos Coelho said he won’t quit after a coalition partner resigned, adding to political turmoil as bond yields surged.

Passos Coelho told voters he’ll try to hold his government together in a televised speech from Lisbon last night after Foreign Affairs Minister Paulo Portas, leader of junior coalition party CDS, quit in protest at the government’s budget policy. Portugal’s 10-year (GSPT10YR) bond yield jumped to a 7-month high.

“I don’t see an important reason to lose the majority in parliament,” Coelho said today at a press conference in Berlin. “Portugal needs a stable government.”

Portas was the second minister to resign this week after finance chief Vitor Gaspar stepped down, saying his credibility had been compromised by the government’s failure to meet budget targets set by the European Union. Portas disagreed with the prime minister’s decision to name Secretary of State for Treasury Maria Luis Albuquerque as a replacement for Gaspar, saying it would mean a continuation of the policies deepening the country’s recession.

“The combination of higher yields and political uncertainty reduces the prospects of Portugal regaining full market access in the next year, and hence leads to expectations of a new full program being required,” Bank of America Merrill Lynch economists Ruben Segura-Cayuela, Sphia Salim and Laurence Boone said in a note.

Aid Program

Portugal’s aid program is due to end in June 2014. The eighth review of the country’s progress is due to take place from July 15, the Finance Ministry said on June 19. The government has started raising cash to finance its 2014 deficit after covering its needs for this year, Gaspar said on May 7.

The German government is confident that “Portugal will continue to stay the course on the agreed path of reform,” Steffen Seibert, Chancellor Angela Merkel’s chief spokesman, said in Berlin today.

The yield on Portugal’s 10-year debt breached 8 percent today, up from as low as 6.35 percent earlier in the week and reaching the highest level since Nov. 21. That’s more than double the average interest rate of 3.2 percent charged for the country’s bailout loans. The difference in yield that investors demand to hold 10-year Portuguese bonds instead of German bunds widened 79 basis points today to 581 basis points.

Draghi’s Test

The increase of about 250 basis points in 10-year yields over the past six weeks is the biggest reversal for the country’s bonds since European Central Bank President Mario Draghi’s pledge to do “whatever it takes” to hold the euro together last July. The pressure of meeting the terms of its 2011 bailout is buckling Coelho’s coalition with investors’ risk appetite already trimmed by speculation the U.S. Federal Reserve is preparing to reduce bond purchases and slowing growth in China.

“It’s the biggest challenge since Draghi” made his promise, Fredrik Erixon, the director of the European Centre for International Political Economy in Brussels, said in a phone interview today. “We are very soon going to see his words tested.”

Social Security Minister Pedro Mota Soares and Agriculture Minister Assuncao Cristas will hand in their resignations to Coelho today after a meeting of the CDS party’s executive commission, broadcaster TVI reported on its website last night, without saying how it obtained the information. Both ministers are from Portas’s CDS party.

Talks

Coelho said he didn’t accept Portas’s resignation and hasn’t asked President Anibal Cavaco Silva to dismiss his partner, citing the foreign affairs minister’s role as leader of a coalition party.

“In the next few hours I will try to clarify and guarantee with the CDS party all the conditions for the stability of the government and to proceed with the strategy of overcoming the nation’s crisis,” Passos Coelho said last night. “Whatever the differences that are at the base of this crisis, we will know how to overcome them in the name of the national interest.”

President Cavaco Silva will meet with Coelho at 5 p.m. tomorrow and will also meet the country’s political parties following the foreign minister’s resignation request, the presidency said on its website today.

Unfortunate Time

“Any government collapse will come at an unfortunate time in terms of being able to deal with the next budget target miss,” said Harvinder Sian and Michael Michaelides, fixed-income strategists at the Royal Bank of Scotland Group Plc. “A minority government buys time but this is unlikely to solve much in terms of market credibility.”

Coelho is battling rising joblessness and a deepening recession as he cuts spending and raises taxes to meet the terms of a 78 billion-euro ($101 billion) aid plan from the European Union and the International Monetary Fund. He announced measures on May 3 intended to generate savings of about 4.8 billion euros through 2015 that include reducing the number of state workers.

“The situation in Portugal is worrying,” Jeroen Dijsselbloem, head of the group of euro-area finance ministers, said in The Hague today. “From here I would like to appeal to the Portuguese government, the political leaders of Portugal, the coalition, to take their responsibilities. I therefore assume that the problems within the Portuguese coalition can be solved.”

Slippage

On March 15, the government announced less ambitious targets for narrowing its budget deficit as it forecast the economy will shrink twice as much as previously estimated this year. In September, Portugal was given more time to narrow its budget gap after tax revenue missed forecasts.

“The repetition of this slippage undermined my credibility as finance minister,” Gaspar said in his July 1 resignation letter.

The Socialist Party, the biggest opposition group, saw its lead over Coelho’s Social Democrats widen by 2 percentage points in a June 7 survey of voters’ intentions, published by weekly newspaper Expresso. The Socialists’ support increased to 36.9 percent from the previous month compared with 24.8 percent for the Social Democrats. The CDS had 7.7 percent.

Coelho formed the majority coalition with the CDS after June 2011 elections, taking over from a Socialist minority government that had requested the EU-led bailout in April 2011. The Social Democrats have 108 seats in the 230-member parliament, while the CDS party has 24 seats.

New Elections

Coalition governments in Portugal have tended to be unstable and short-lived. Between 1974, when the country returned to democracy after a four-decade dictatorship, and Coelho’s election in 2011, Portugal had six coalition governments, none of which survived a full term.

“The Portuguese do not deserve this situation,” Socialist Party leader Antonio Jose Seguro said in Lisbon after Coelho’s speech. “Our country needs a new government. It’s necessary to have elections.”

Any new government is likely to accept the EU’s aid program for Portugal as the Socialists have voted alongside the governing coalition on certain key policy decisions such as the European Stability Mechanism treaty, even though Seguro is calling for a renegotiation of the terms of the existing rescue package.

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net; Henrique Almeida in Lisbon at halmeida5@bloomberg.net

To contact the editors responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net; Jerrold Colten at jcolten@bloomberg.net

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