Portuguese Parliament Rejects Government's Austerity Plan to Trim Deficit
Portuguese Prime Minister Jose Socrates said he presented his resignation to President Anibal Cavaco Silva after parliament rejected the government’s deficit- cutting plan, raising the chance of an international bailout.
Socrates made the announcement tonight in an address to the nation after meeting with Cavaco Silva at the president’s residence in Lisbon. “This crisis occurs in the worst possible moment for Portugal,” Socrates said.
Cavaco Silva will meet political parties represented in parliament on March 25 and the government will retain its full powers until the president accepts Socrates’s resignation, according to a statement on the president’s website.
The euro weakened to $1.4083 following the announcement. It came after lawmakers backed resolutions against the government’s stability and growth program, and before European Union leaders meet tomorrow in Brussels to sign off on measures aimed at stopping the contagion that led Greece and Ireland to accept EU- led rescues. The meeting begins as the cost of insuring Portuguese debt against default hovers near a record high.
Socrates had said last week that his minority government was available to discuss deficit-cutting measures with opposition parties to avert a “political crisis.” Portugal is raising taxes and implementing the deepest spending cuts in more than three decades to convince investors it can narrow its budget gap, curb debt and avoid seeking a rescue from the EU.
The spread between Portuguese and German 10-year bond yields widened 16 basis points to 439 basis points today after reaching a euro-era record of 484 on Nov. 11. Ireland in November became the second euro country after Greece to seek a bailout and the first to request aid from the European Financial Stability Facility. Portugal’s 5-year bond yield climbed to a euro-era record of 8.202 percent today, according to data compiled by Bloomberg.
“If parliament decides on a motion against the stability and growth program, that means the government is not in a condition to make commitments internationally,” Socrates said on March 15. “That would mean a political crisis. In my understanding, the consequence of a political crisis is the worsening of the financing risks of our economy and would lead Portugal to request external intervention.”
Finance Minister Fernando Teixeira dos Santos on March 11 presented additional deficit-cutting measures equal to 4.5 percent of gross domestic product over three years, including a reduction in pensions of more than 1,500 euros ($2,132) a month and further cuts in tax benefits.
The Social Democrats, the biggest opposition group in parliament, contested the new austerity measures. The party has still said it supports Portugal’s plan to reduce its budget gap and meet deficit targets.
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 in parliament by abstaining.
Between 1995 and 1999, Antonio Guterres led the only minority government in Portugal to survive a full term since the end of a four-decade dictatorship in 1974. Portugal has been trying to avoid requesting aid for the first time since 1983, when it received external help from the Washington-based International Monetary Fund.
The Social Democrats led the ruling Socialists in a survey of voters’ intentions for parliamentary elections published by Diario Economico on Feb. 25. The survey indicated 48 percent backing for the Social Democrats, led by Pedro Passos Coelho, and 29 percent support for the Socialists, the newspaper said.
Portugal intends to sell as much as 20 billion euros of bonds this year to finance its budget and cover the cost of maturing debt. Portugal faces bond redemptions in April and June worth about 9 billion euros in total. It also faces bill maturities in July, August, September, October and November.
“With bond yields stubbornly high and heavy debt redemptions due over the next few months, it appears all but inevitable that Portugal will be forced to follow Greece and Ireland in accepting financial support,” economists Emilie Gay, Roger Bootle and Jonathan Loynes of Capital Economics Ltd. wrote in a note yesterday.
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