Bloomberg News

Portuguese Vote to Pick Enforcer of Rescue’s Austerity Plan

June 03, 2011

(Updates with bond yields in sixth paragraph, voter polls starting in ninth.)

June 3 (Bloomberg) -- Portugal’s opposition leader, Pedro Passos Coelho, leads Socialist Prime Minister Jose Socrates in polls heading into elections in two days that may enable him to forge a majority coalition.

The government formed following the June 5 vote will have to enact budget cuts required in a 78 billion-euro ($113 billion) international bailout even as unemployment climbs and the economy shrinks.

“The market is really not interested in the fine print details of the parties’ programs,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “All we need is implementation. You need a strong government executing what needs to be done. You need a clear outcome from the election. Any not clear outcome would be a burden on the secondary market.”

Socrates’ minority government fell in March after lawmakers rejected proposed cuts as he struggled to avoid a bailout. With the country’s debt and borrowing costs surging, Portugal followed Greece and Ireland in seeking a rescue, bringing to 256 billion euros the aid provided to stamp out the sovereign debt crisis. Another minority administration may threaten Portugal’s ability to cut spending and receive rescue funds.

Borrowing costs have increased since the bailout. At a June 1 auction, 850 million euros of three-month bills were sold at an average yield of 4.967 percent. That compares to 4.652 percent at a May 4 auction of three-month bills. Portugal faces a 4.9 billion-euro bond redemption June 15, its only bond maturity until June 2012.

Bond Yields

The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds reached a euro- era record of 683 basis points on May 30 and was at 673 today. The 10-year bond yield was at 9.745 percent and the five-year bond yield was at 11.393 percent.

Opinion polls indicate no party will win a majority. The Social Democrats led by Passos Coelho, 46, and the People’s Party, the biggest and second-biggest opposition parties, have said they support the rescue, while blaming Socrates, 53, for having to seek it.

“Socrates has a credibility problem,” as he had to ask for aid, said Andre Freire, a political analyst and a university professor at Lisbon’s Higher Institute for Labor and Business Sciences. “On the positive side he has experience, he is very combative and that is very important politically.”

Socialists Sinking

The Social Democrats have increased their poll lead. A poll published today by the Jornal de Negocios newspaper indicated 36.3 percent backing for the Social Democrats, 5 percentage points more than in a survey published on May 19, and 30.1 percent support for the Socialists, 0.6 percentage point more than in the previous poll. The survey showed 12.4 percent support for the conservative People’s Party.

Another survey published today by Publico newspaper indicated 36.5 percent backing for the Social Democrats and 31.1 percent for the Socialists. The survey showed 11.6 percent support for the People’s Party.

The Social Democrats and People’s Party have said that if they fall short of a majority, they won’t form a unity government with the Socialists as long as Socrates remains party leader. The People’s Party, or CDS-PP, is a possible coalition partner for the Social Democrats, or PSD.

Seeking a Majority

“The market does not have a position in terms of preferring the Socialist Party or the Social Democratic Party,” said Diogo Teixeira, chief executive officer of Optimize Investment Partners, a Lisbon-based firm that manages 45 million euros in assets, including Portuguese government debt. “The only preference is for a clear majority. There won’t be a negative reaction if the PSD and CDS have a majority. That would be a positive scenario.”

The three-year aid plan for Portugal set goals for a budget deficit of 5.9 percent of gross domestic product this year, 4.5 percent in 2012 and 3 percent in 2013. The country had the fourth-biggest deficit in the euro region last year at 9.1 percent of GDP.

Portugal’s public debt swelled to 93 percent of GDP in 2010 from 68 percent in 2007. The European Commission forecasts Portugal’s debt will increase to 101.7 percent this year and 107.4 percent in 2012.

“The program must be implemented urgently,” Portuguese Finance Minister Fernando Teixeira dos Santos said on May 23. “The country at this moment has three big challenges. First: implement the program; second: implement the program; and third: implement the program. Whoever wins the elections, whoever forms government, won’t have time to sit down.”

Asset Sales

A privatization program representing about 3.5 percent of GDP aims to sell stakes in companies including EDP-Energias de Portugal SA, the biggest electricity provider, and REN-Redes Energeticas Nacionais SA, the operator of the national power grid, by the end of this year.

The aid program envisions a recovery in 2013, with unemployment peaking at 13 percent in that year, according to Teixeira dos Santos. Portugal’s unemployment rate rose to 12.4 percent in the first quarter.

The government said on May 5 the economy will shrink 2 percent this year, twice as much as it previously forecast. GDP will also decline 2 percent in 2012, the minister said. The country’s economic growth has averaged less than 1 percent a year in the past decade, one of Europe’s weakest rates.

Spending Cuts

The aid package calls for spending reductions for 2012 and 2013 amounting to 3.5 percent of GDP, while revenue increases will represent 1.4 percent of output. The government will freeze public workers’ salaries through 2013 and cut pensions of more than 1,500 euros a month. Tax deductions will be limited.

“There is consensus in terms of fulfilling the agreement,” Paulo Macedo, deputy chief executive officer of Banco Comercial Portugues SA, Portugal’s biggest publicly traded bank by assets, said on May 30. “Now we have to focus on the best possible execution of the agreement. It’s not going to be about a government just to fix public accounts; it will have to do the necessary structural reforms to ensure growth.”

--With assistance from Anabela Reis in Lisbon. Editors: James Hertling, Jeffrey Donovan

To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net.

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net


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