(Updates with comment from Passos Coelho in third paragraph.)
June 17 (Bloomberg) -- Pedro Passos Coelho, Portugal’s incoming Social Democratic premier, named Vitor Gaspar as finance minister in a government that will be constrained by the terms of a 78 billion-euro ($112 billion) bailout program.
Gaspar, a special adviser to the Bank of Portugal, was head of the Bureau of European Policy Advisers at the European Commission from January 2007 to February 2010, and was director- general of research at the European Central Bank from September 1998 until December 2004, according to the website of Lisbon’s Catholic University, where he is a professor.
“I worked very quickly so that the country would be able to know in record time the government that will be in office during the next four years,” Passos Coelho told reporters today following a meeting with President Anibal Cavaco Silva. The president named Coelho prime minister on June 15.
The new finance minister will have to implement an austerity plan that was a condition of the financial aid package from the European Union and the International Monetary Fund. With the country’s debt and borrowing costs surging, Portugal followed Greece and Ireland in April in seeking a rescue.
The leader of Passos Coelho’s coalition partner, Paulo Portas, was named foreign minister, Alvaro Santos Pereira will be economy and employment minister, and Paulo Macedo will be health minister, according to a statement posted on the presidency’s website. The government will be sworn in on June 21.
President Cavaco Silva said on June 6 that it would be “convenient” for Passos Coelho to attend a summit of EU leaders on June 23.
Passos Coelho’s Social Democrats and the People’s Party signed an agreement yesterday to form a coalition following June 5 elections that gave the two parties combined a majority of seats in parliament. The Social Democrats defeated the Socialist Party of outgoing Prime Minister Jose Socrates in the vote.
Socrates’ minority government fell in March after lawmakers rejected his proposed deficit-cutting plan as he struggled to avoid the bailout.
Borrowing costs have increased since Portugal requested aid. The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds reached a euro- era record of 820 basis points today, up from 511 basis points when Socrates sought the bailout on April 6. The 10-year bond yield reached 11.163 percent today and the five-year yield rose to 12.915 percent, also the highest levels since the euro was adopted in 2000.
Portugal’s 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.
“It’s a very strong and very front-loaded fiscal program,” Poul Thomsen, head of the IMF mission in Portugal, said on May 5.
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 17- country 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.
Gaspar will oversee a privatization plan representing about 3.5 percent of GDP that 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 program must be implemented urgently,” 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.”
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, Kevin Costelloe
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