Bloomberg News

President Urges Portugal Salvation Pact Weakening Coalition Plan

July 11, 2013

President Anibal Cavaco Silva

President Anibal Cavaco Silva said, “To start a new electoral process now could mean going backward on what we have achieved.” Photographer: Patrick Hertzog/AFP via Getty Images

President Anibal Cavaco Silva urged Portugal’s ruling parties to broker a deal with the main opposition to see out its European bailout program, raising doubts about a patched-up coalition agreement.

Cavaco Silva called on Prime Minister Pedro Passos Coelho’s Social Democrats to bring the Socialist opposition into a broader agreement for “national salvation” to steer the country through June next year and then call an early election. He didn’t comment on the premier’s plan to hand control of economic policy to his junior coalition partner.

“To start a new electoral process now could mean going backward on what we have achieved,” Cavaco Silva said in a televised speech last night. “The signs of economic recovery that have recently emerged would regress, and investment, which is so decisive for a return to growth and job creation, would continue to be delayed.”

The two parties in government last week settled a split over budget policy with Coelho offering Foreign Minister Paulo Portas responsibility for talks relating to the bailout and the post of vice premier. The disagreement, which followed the resignation of Finance Minister Vitor Gaspar, raised the specter of a second bailout for Portugal and sent bond yields to a seven-month high.

“In the short term the president’s decision should increase uncertainty,” Tiago Veiga Anjos, an analyst at Banco BPI SA in Oporto, said today in a research note. “This uncertainty should negatively affect the stock market and Portugal’s sovereign yields.”

Bonds Fall

The country’s 10-year bond yield rose 10 basis points to 6.87 percent at 12:28 p.m. in London, up from 6.45 percent on June 28, the last trading day before Gaspar’s July 1 resignation. The yield breached 8 percent last week after the rift in the coalition emerged. The country pays 3.2 percent on its bailout loans.

Portugal’s PSI-20 (PSI20) benchmark stock index dropped 1.7 percent. Most stocks, bonds and commodities rose around the world today after Federal Reserve Chairman Ben S. Bernanke said the U.S. economy will continue to need stimulus measures.

Cavaco Silva called on Coelho and Portas to reach an agreement with the main opposition Socialist Party quickly to allow Portugal to complete its aid program and ensure that the country’s debt will be sustainable. He said he wanted to see a new government elected only after the aid program is completed.

“It’s essential to rule out the risk of a return to the situation we’re currently experiencing,” said the president. The government now has “full powers,” he added.

Elections

“The start of the process that leads to elections should coincide with the end of the financial aid program” in June 2014, said Cavaco Silva, who has the power to dissolve parliament. Coelho’s Social Democrats and the conservative CDS party led by Portas have a majority in parliament and their term ends in 2015.

Socialist Party leader Antonio Jose Seguro has called for a renegotiation of the terms of the existing aid package, though his party has voted alongside the governing coalition on key policy decisions including the European Stability Mechanism treaty, the fiscal compact, and the country’s budget framework law. The Socialists, who led Coelho’s Social Democrats by 14 percentage points in a poll last month, on July 9 repeated a call for early elections.

Eighth Review

The eighth review of Portugal’s progress on meeting terms of the 78 billion-euro ($102 billion) aid program is due to start July 15, the Finance Ministry said last month. The government has started raising cash to finance its 2014 deficit after covering its needs for this year, Gaspar said in May when he was still finance minister.

“The next nine months of the Portuguese economy are critical for the following phase,” Bank of Portugal Governor Carlos Costa said yesterday. “It’s during these next nine months that we will have to assure and confirm the credibility of our commitments and the evolution of our economy and our budget situation.”

On March 15, the government announced less ambitious targets for narrowing its budget deficit as it forecast the economy will shrink twice as much as previously estimated this year. Portugal targets a deficit of 5.5 percent of gross domestic product in 2013, 4 percent in 2014 and below the EU’s 3 percent limit in 2015, when it aims for a 2.5 percent gap. It forecasts debt will peak at 123.7 percent of GDP in 2014.

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Henrique Almeida in Lisbon at halmeida5@bloomberg.net

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net


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