Portuguese Socialist Costa to Lead New Minority Government

  • President names Costa premier after Coelho's government ousted
  • Socialists plan to form minority government, ease austerity

Portuguese President Anibal Cavaco Silva named Socialist leader Antonio Costa prime minister and head of a minority government that aims to ease austerity measures at a faster pace than its predecessor.

Keeping Pedro Passos Coelho’s government in a caretaker role wouldn’t be in the country’s interest and early elections can’t be called now, the presidency said in a statement handed to reporters in Lisbon on Tuesday. The president “took due note” of Costa’s responses to the questions he raised about the “stability and durability” of a minority Socialist Party government.

The Socialists joined other opposition parties and formed a majority to block the government’s program and oust Premier Coelho in a vote in parliament on Nov. 10, five weeks after Coelho’s coalition took the most votes in a general election. The Socialists say their minority administration will be propped up by the Left Bloc, Communists and Greens, which haven’t followed the Socialists in backing European Union budget rules in the past.

“The challenge for the new prime minister will be to abide by Portugal’s EU commitments while maintaining the support of the Communists and the Left Bloc in parliament,” said Marina Costa Lobo, a political scientist at the Institute of Social Sciences of the University of Lisbon.

The Socialists, who aren’t proposing to form a coalition government, on Nov. 10 signed separate documents -- termed as “joint positions” -- with the Left Bloc, Communists and Greens. The Left Bloc has said in the past it wants to restructure the country’s debt, while the Communists have said Portugal should prepare to exit the euro.

Fragile Alliance

“The fragility of the alliance between left-wing parties does not bode well for the stability of a Socialist administration,” Antonio Barroso, an analyst at Teneo Intelligence in London, said in a note.

Portugal’s 10-year bond yield fell 2 basis points to 2.53 percent on Tuesday, after climbing on Nov. 9 to as much as 2.91 percent, the highest since July. It was at 2.3 percent just before the Oct. 4 election. After peaking at 18 percent three years ago at the height of Europe’s debt crisis, the yield fell to as low as 1.5 percent in March following the European Central Bank’s announcement of its bond-buying program.

“ECB policy easing -- which we expect to be extended at next week’s policy meeting of the Governing Council -- has created the fiscal space for looser fiscal policies than otherwise, including in Portugal,” Andrew Benito, an economist at Goldman Sachs Group Inc. said in a research note on Tuesday.

The Socialists plan to reverse state salary cuts and bolster family incomes. Costa says he can do that and keep the budget deficit below the EU limit of 3 percent of gross domestic product through 2019. His program also includes a gradual increase in the minimum wage, and a proposal to study changing income-tax brackets and taxing any inheritance of more than 1 million euros ($1.1 million).

Costa, 54, became Socialist leader after unseating his predecessor in his party’s primary elections in September 2014. He was minister of internal administration from 2005 to 2007 and served as Lisbon mayor from 2007 to April 2015.

Return to Power

The Socialists return to power after Coelho led the first coalition to survive a full term in office since 1974. A Socialist government requested an international bailout that was then largely implemented by Coelho following his election win in 2011.

Coelho’s cabinet preferred an export-led recovery and planned to ease austerity at a slower pace than the Socialists. He won the most seats in the Oct. 4 election, though his coalition fell short of the majority it held for the past four years as it led Portugal through the financial aid program.

The constitution states that parliament can’t be dissolved less than six months after it’s elected, meaning that early elections could only be called from April 2016. The Coelho government’s coalition led the Socialists by 8.3 percentage points in a survey published by Expresso earlier this month. That’s wider than the gap of 6.1 percentage points by which the Socialists lost the Oct. 4 election.

Portugal is no stranger to forming minority governments, though they tend to be short-lived. It’s more than 15 years since Socialist leader Antonio Guterres led the only minority government in Portugal to survive a full term since 1974, when a four-decade dictatorship ended.

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