Bloomberg News

Coelho Will Sign Portuguese Coalition Agreement Tomorrow

June 15, 2011

(Updates with Passos Coelho comment in second paragraph.)

June 15 (Bloomberg) -- Pedro Passos Coelho, Portugal’s incoming Social Democratic prime minister, said his party will sign an agreement on forming a coalition government tomorrow with the People’s Party, known as the CDS-PP.

“We have all the conditions to have a majority for change,” Passos Coelho told reporters in Lisbon today after a meeting with Portuguese President Anibal Cavaco Silva. “The country will have a majority for the next four years.”

Cavaco Silva today named Passos Coelho as Portugal’s next prime minister, according to the presidency website. The president said on June 6 it would be “convenient” for Passos Coelho to attend a summit of European Union leaders on June 23. Passos Coelho’s Social Democrats defeated the Socialist Party of Prime Minister Jose Socrates in June 5 elections.

Having a majority in parliament will help the new coalition in implementing an austerity plan that was a condition of a 78 billion-euro ($111 billion) bailout from the EU and the International Monetary Fund. With the country’s debt and borrowing costs surging, Portugal followed Greece and Ireland in April in having to seek a rescue.

Borrowing costs have increased since then. The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds reached a euro-era record of 777 basis points on June 13 and was at 770 basis points today, up from 511 basis points when Socrates sought the bailout on April 6. The 10-year bond yield was at 12.344 percent today and the five-year yield rose to 12.364 percent, the highest level since the euro was adopted in 2000.

Debt Auction

Even so, yields fell today when Portugal auctioned 1 billion euros of six-month and three-month bills. The securities due in December were issued at an average 4.954 percent, less than the 5.529 percent at the previous auction on April 20. The bills due in September were sold at an average 4.863 percent, compared with 4.967 percent at the previous auction on June 1.

Socrates’ minority government fell in March, leading to the early elections, after lawmakers rejected his proposed deficit- cutting plan as he struggled to avoid a bailout.

Coelho’s Social Democrats and the People’s Party won a combined 129 seats in the 230-member parliament in the June 5 vote. The winners of four seats representing Portuguese living abroad are still to be determined.

Golden Shares

The new government will have to carry out various measures by the end of July, including the sale of failed lender Banco Portugues de Negocios SA and the elimination of all “golden shares” or other special rights held by the state in publicly traded companies. It will also have to propose a law on reducing severance payments and present a plan to cut employers’ social security contributions.

The aid package calls for spending reductions for 2012 and 2013 amounting to 3.5 percent of gross domestic product, while revenue increases will represent 1.4 percent of output. The government will freeze public-sector 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 phase out rent control and merge some of its municipalities.

The three-year aid plan set goals for a budget deficit of 5.9 percent of GDP this year, 4.5 percent in 2012 and 3 percent in 2013. The country had the fourth-biggest gap 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 debt ratio will start declining from 2013, according to outgoing Finance Minister Fernando Teixeira dos Santos.

Teixeira dos Santos said on May 5 the economy will shrink 2 percent this year, twice as much as he previously forecast, as further austerity measures are implemented. GDP will also decline 2 percent in 2012, he said. Portugal’s economic growth has averaged less than 1 percent a year in the past decade, one of Europe’s weakest rates.

--Editors: Eddie Buckle, Andrew Atkinson

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net.

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


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