Portugal Hostage to Communists After Costa Ambushes Coelho

  • Costa's minority Socialist government aims to ease austerity
  • Communists, Left Bloc, Greens will back government, Costa says

Portugal’s new Prime Minister Antonio Costa will need to keep a group of anti-austerity radicals onside to sustain his minority Socialist government after his maneuver to seize power tore up a four-decade political convention.

Costa, sworn in as premier in Lisbon Thursday, teamed up with the Communists and the Left Bloc this month to force out Pedro Passos Coelho just five weeks after Coelho’s Social Democrat-led coalition won the most votes in October’s election. The two parties have helped each other out from time to time over the years. Now the Social Democrats swear they’d rather see Portugal dragged back toward crisis than help their nemesis stay in office.

Antonio Costa

Photographer: Paulo Duarte/Bloomberg

No one is predicting a Greek-style meltdown, but the breach leaves Portugal with a weakened government that may struggle to drive through economic reforms and could plunge the country back into election mode as soon as April.

“This government is unprecedented,” Federico Santi, a political analyst at Eurasia Group in London, said in a Nov. 25 note. “The moderate, strongly pro-European Socialist Party has never before formed a parliamentary majority with the aid of more radical leftist parties, considered too extreme.”

Costa has pledged to increase the minimum wage and reverse state salary cuts only gradually and to keep below the European Union’s 3 percent budget-deficit limit. The new government holds its first cabinet meeting at 9:30 a.m. Friday.

“We will not make progress with radicalization,” Costa said Thursday after being sworn in. “The government’s program will be moderate, carrying out an alternative to the vertigo of austerity that only worsened the economic, social and even budgetary problems.”

‘Critical Test’

That stance may sit uneasily with his new bedfellows. The Communists have said Portugal should prepare to exit the euro and the Left Bloc has said in the past it wants to restructure the country’s debt, though the two groups have signed “joint positions” with the Socialists in other policy areas.

Portugal’s 10-year bond yield fell 6 basis points to 2.28 percent on Friday, after reaching a four-month high of 2.91 percent on Nov. 9. The yield was as low as 1.5 percent in March after the European Central Bank announced its bond-buying program.

For the new administration, the 2016 budget will be a “critical test,” Antonio Garcia Pascual, an economist at Barclays Plc, said in a Nov. 25 note. “It is not yet clear how some of the Socialist Party proposals such as the enhanced public expenditures and possible changes to some taxes can help to achieve a deficit below 3 percent.”

In the past, Portugal’s two main parties have helped each other out when they needed to push difficult-yet-necessary measures through parliament. In 2010, the Social Democrats abstained to let a minority Socialist government push through its budget while the Socialists voted alongside Coelho on some key policies during his first term.

Now those days are over, after the Socialists joined other opposition parties to form a majority that blocked the government’s program and ousted Coelho in a Nov. 10 vote.

“The Socialist Party wasn’t available to support the government that won the elections,” Coelho said in an interview with television station RTP on Nov. 20. “It can’t expect support in the future from those it declined to support. The Socialist Party has no legitimacy to ask us for anything.”

Minority Governments

Coelho led the first coalition government to survive a full term in Portugal since the dictatorship ended in 1974. During his four years in office, he implemented most of the three-year bailout program that the Socialists had requested from the EU and International Monetary Fund in April 2011.

But the ruling coalition failed to retain its majority in October’s election, taking 107 of the 230 parliamentary seats, 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 and the Greens have two.

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

Coelho and his allies, who’ve seen their polling numbers improve since the election, are lining up to make sure that Costa doesn’t follow him.

Then-Vice Premier Paulo Portas, leader of junior coalition party CDS, warned Costa of the potential risks of his putsch before the Nov. 10 vote.

“Don’t come asking for help afterward,” he told the Socialist leader.

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