Bloomberg News

Coelho Told by Portugal’s Cavaco to Hurry Coalition Talks

June 07, 2011

(Updates with comments by EU’s Rehn in eighth paragraph, Cavaco in ninth.)

June 7 (Bloomberg) -- Pedro Passos Coelho, Portugal’s incoming prime minister, was told by President Anibal Cavaco Silva to start talks immediately on forging a coalition to ensure austerity measures mandated by a 78 billion-euro ($114 billion) bailout stay on track.

The order that Coelho move came in their meeting yesterday in Lisbon less than 24 hours after the Social Democrat unseated Socialist Jose Socrates, Jose Manuel Nunes Liberato, a presidential aide, told reporters.

Starting talks with the People’s Party before all the results are in underscores officials’ concerns over meeting deadlines prescribed in the bailout. Leaders of the third-place finishers meet today in Lisbon and may signal their demands to join as Coelho’s junior partner.

“There is a majority government and that is a necessary condition to implement the very difficult structural reforms and the challenging fiscal consolidation,” Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London, said yesterday.

Coelho’s Social Democrats and the People’s Party, won a combined 129 seats in the 230-member parliament with four seats yet to be decided, according to official results.

While all three major parties committed to the bailout’s program of spending cuts and asset sales, a new majority taking over from Socrates’ minority administration gave bonds a boost. Yields on 10-year notes rose 8 basis points to 9.372 percent in Lisbon as of 10:16 a.m. today.

Risk Spreads

The risk premium investors demand to hold 10-year Portuguese notes over German bunds declined 4 basis points to 670, still up from 511 when Socrates sought the rescue April 6.

“I count on the new government to implement the program that was agreed with the EU and the IMF,” European Economic and Monetary Affairs Commissioner Olli Rehn told reporters yesterday in Strasbourg, France. “I trust that the government will be formed in due course. It’s essential that the program will be implemented.”

Cavaco told reporters late yesterday that it would be “convenient” for Passos Coelho to attend a summit of EU leaders on June 23. He also said the government may be sworn in before or on that day, according to a video available on the presidency’s website.

Prestige, Credibility

The economy is set to shrink this year and unemployment is 12.4 percent even before the government pushes through demands from the EU and the International Monetary Fund. The plan is to reduce the deficit to the EU ceiling of 3 percent of gross domestic product by 2013 from 5.9 percent in 2011.

“We will only be able to recover prestige and credibility abroad if we are able to meet the program we agreed to, but also if we are able to go beyond that to give a perspective of growth and job creation for the Portuguese economy,” said Coelho, 46.

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, while tax deductions will be limited. Portugal also agreed to reduce workers’ severance payments, phase out rent control and merge some of its municipalities.

‘Promising Ourselves’

“We have to do what we have been promising ourselves to do for the last 20 years,” Antonio Nogueira Leite, a Social Democrat adviser, said in a Bloomberg Television interview yesterday.

Portugal’s public debt swelled to 93 percent of GDP in 2010 from 68 percent in 2007. The European Commission forecasts the debt will increase to 101.7 percent this year and 107.4 percent in 2012. The debt ratio will start declining from 2013, outgoing Finance Minister Fernando Teixeira dos Santos says.

“It’s not clear-cut whether debt is sustainable,” Barclays Capital’s Garcia Pascual said. “If they fully deliver the program, including the structural reforms, they might get away without restructuring. But it’s by no means easy.”

Asked whether he would rule out the need for a Portuguese debt restructuring in coming years, Nogueira Leite said “we’re going to be running a game on a razor’s edge, we know that. If we manage to have the economy growing at the end of next year then we do have a chance of repaying our debts orderly as planned.”

Finance Possibilities

Candidates for the post of finance minister may be Vitor Bento, the chairman of payment-processing company SIBS SA and a former head of the debt agency, and Joao Duque, a professor of Finance and president of the Economics and Management Institute of Lisbon’s Technical University, daily business newspaper Diario Economico reported.

The next legislature will probably open at the end of June, according to the Portuguese parliament’s website.

Socrates’ government fell in March after lawmakers rejected his deficit-cutting proposals intended to avoid a bailout. With the country’s debt and borrowing costs surging, Portugal followed Greece and Ireland in seeking a rescue. After the election defeat, Socrates said he’d quit as Socialist leader.

The Social Democrats won 39 percent of the vote and 105 seats, up from 81, according to official results. The Socialists, who ruled with a minority since 2009, won 28 percent and 73 seats, down from 97. The People’s Party took 12 percent and 24 seats.

--With assistance from Jonathan Stearns in Strasbourg, France. Editors: James Hertling, Craig Stirling

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

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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