Portuguese Alliance to Topple Coelho Sends Bond Yields Higher

  • Socialists, Left Bloc, Communists unite to replace premier
  • Costa government would speed end to post-bailout spending cuts

Pedro Passos Coelho, Portugal's prime minister.

Photographer: Paulo Duarte/Bloomberg

Antonio Costa,

The vote threatens to plunge Portugal back into political uncertainty just a month after the country’s first general election since 2011. Social Democratic premier Coelho has struggled to form a viable administration after his coalition fell short of the majority it held in the past four years when Portugal completed its European bailout program.

The Socialist-led program “is clearly less market-friendly than the one of the incumbent government,” said Clement Mary-Dauphin and other analysts at Royal Bank of Scotland Group Plc said in an e-mailed note.

Coelho will fall if the Socialists and their allies close ranks and guarantee a majority in parliament to reject the program in a scheduled vote. President Anibal Cavaco Silva, who has the power to name prime ministers, would then decide if he’ll ask Costa to form a government. Parliament can’t be dissolved less than six months after it’s elected, meaning Cavaco Silva doesn’t have the option of calling fresh elections.

“The conditions are in place to form a Socialist Party government supported by a majority in parliament,” the party said in a statement e-mailed early on Monday. The Socialist government can be “stable” and last for a full term, it said.

The Socialists, Left Bloc and Communists can together muster a majority. Lawmakers will start discussing the proposed program at 3 p.m. on Monday.

“The Communist Party reaffirms there is no political or institutional reason that can be invoked by the president to question this government solution,” leader Jeronimo de Sousa said on Sunday. “There is a majority in parliament that’s enough for the Socialist Party to form a government, present its program, take office and adopt a policy that ensures a lasting solution for the full term.”

Bonds Drop

Ten-year yields rose 17 basis points to 2.85 percent as of 11:28 a.m. London time, after
reaching 2.87 percent, the highest since July. While the security traded as high as 18 percent three years ago at the height of Europe’s debt crisis, it was as low as 1.5 percent in March and 2.3 percent just before the elections.

The Left Bloc has said that it wants to restructure the country’s debt, and the Communists have said Portugal should prepare to exit the euro. The Socialists, who requested the bailout and then lost the 2011 election, have been less radical, voting alongside Coelho’s coalition on policies including the treaty establishing the European Stability Mechanism rescue fund.

This week’s parliamentary drama follows a frenetic weekend of political developments in Lisbon. The Socialists agreed with the Left Bloc, Communists and Greens on some matters to include in a government program, Costa said on Friday night. He had said he would only reject Coelho’s plan if the Socialists could offer an alternative.

Then the Socialist Party’s National Commission on Saturday approved Costa’s proposed program, which includes a gradual increase in the minimum wage and a proposal to study changing income-tax brackets. The Socialists also want to reverse state salary cuts and bolster families’ incomes. The budget deficit is forecast to be lower than the EU limit of 3 percent of gross domestic product through 2019.

The ruling coalition parties took 107 of the 230 seats in parliament in the Oct. 4 election, including 89 for Coelho’s Social Democrats. The Socialists have 86 members of parliament, while the Left Bloc and Communists hold 19 and 15 seats, respectively. The Greens have two lawmakers.

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