As Big Vote Nears, Bailout Looms for Portugal
With Portugal’s main opposition Social Democrats (PSD) announcing they will vote Wednesday against a raft of new austerity measures proposed by Prime Minister Jose Socrates, analysts expect the country will have no choice but to seek a bailout from Europe.
But none of this is likely to come as a surprise. The markets, and Brussels, have long been prepared for the Portuguese government to seek financial help from the European Union (EU), with many seeing it as inevitable as far back as November.
Back then Portugal’s finance minister, Fernando Teixeira dos Santos, warned his country might seek a bailout from Brussels as Ireland began preliminary bailout discussions over its debt.
The markets have the bailout relatively priced in, Manoj Ladwa, a senior trader at ETX Capital, told CNBC.com.
“It was only a matter of time before it came to this. The sovereign debt issue had gone quiet over the last couple of months and certainly the last few weeks ... but it was always going to rear its ugly head again,” Ladwa said.
The issue of European sovereign debt has lately been overshadowed by unrest in the Middle East and the earthquake in Japan, but many analysts have pointed out that the euro zone's debt problems are far from being solved.
While Spain narrowly avoided having to request a bailout in February Portugal has struggled to convince the markets it has the capability to tackle its deficit even after the EU’s decision on March 12 to increase the European Financial Stability Fund (EFSF)'s lending ability to 440 billion euros ($705 billion).
In Spain’s case the government was able to reach agreement with trade unions over public spending and the sale of trophy assets including its airports, all of which helped steady confidence the government had a plan to deal with its deficit despite the economy being in recession.
Things have improved enough in the last month that Spain went as far as to return to the bond markets last week to test the level of confidence in its fiscal strategy. Yields in an auction of Spanish T-bills fell Tuesday, while demand was strong.
Portugal, on the other hand, struggled to sell its debt last week, when there was some market talk that the European Central Bank (ECB) was making inquiries about the prices of peripheral euro-zone debt. Traders quoted by Reuters said they did not see the ECB actually buying any debt.
The move helped to lower yields on Portuguese 10-year bonds but they remain above 7 per cent, a level the government has said is unsustainable in the medium term.
Equally unsustainable, some believe, is the economic and social cost of Socrates’ austerity measures. Some analysts even see it as a political move by the prime minister to either pave the way for a bailout or to force the country to accept austerity measures equivalent to 4.6 per cent of gross domestic product (GDP).
The chances of Portugal going to Brussels to seek financial support were “very high,” Luigi Speranza, global head of inflation forecasting at BNP Paribas, told CNBC.
“We think it will happen. In fact the chances of Portugal seeking a bailout have increased to the point where they are very high," Speranza said.
"Portugal can be seen as a bit of a moral story because, what is the point (of the austerity package)? If you look at the financial stability programme set out on Monday, even the government admits that the effort required will amount to around 5 percent of GDP. So it has become a question of whether this should be implemented at all,” he said.
“This is the question being asked given the effect on growth, so this is a plan that will have a significant effect on economic activity and jobs growth,” Speranza added.
Given that the PSD is leading in opinion polls, the implementation of the new austerity measures is a major decision and one Socrates may not want to take at all, suggesting his threat to resign was not only real, but also designed to ensure a bailout was the only option available to the government, according to Speranza.
“If the government loses the vote and Socrates resigns, that will cause political uncertainty which will mean the new government will have to go to the European Financial Stability Fund,” he added.
But should Socrates go through with his threat to resign it would be June before the new government would be able to apply to the EFSF.
Under Portugal’s constitution the government would stay on in a caretaker capacity until a general election could be held.
A snap election can’t take place immediately. Portugal’s constitution makes it impossible for an election to take place for a further 55 days after the government resigns and parliament is dissolved. During that time the government would have limited powers and would be unable to request a bailout from Brussels.
That preseents a risk of further contagion and makes it likely that the threat by Socrates to resign if the austerity package is not passed Wednesday by parliament amounts to no more than brinkmanship, according to Justin Urquhart Stewart, co-founder of Severn Investment Management.
“Is it an idle threat? Technically he could resign but I don’t think it likely, it feels like a lot of posturing. What we are dealing with (is) politicians trying to play political poker without really thinking about the consequences,” Stewart said.
That said, one view reportedly shared by finance ministers across Europe is that if Portugal is to seek a bailout, it should get on with it.
“The sooner they get on with it the better whoever it is, Ireland, Portugal or Greece. I would force them to get on with it,” Urquhart Stewart added.