Portugal's minority center-right government has collapsed. It
was less than two months old. Its downfall was made possible by the
willingness of the Socialists, the main opposition party to form a majority
with the Left Bloc, Communists, and Greens. They garnered 123 votes in
the 230 seat parliament to defeat Coelho's program. Coelho led a majority
government until last month's election that saw it reduced to a minority.
The next step is not immediately clear. There are three general
alternatives. First, President Silva can name Costa, the head of the
Socialists, to form a new government. Of course this is the
preference of the loose coalition he led to defeat Coelho's program.
Second, Silva could seek an alternative candidate. This does not seem to
be a particularly compelling path. Third, Silva could allow Coelho
to serve as a caretaker until new elections can be held, probably in Q2.
This would be quite political and controversial. Yet by allowing Coelho
to form a minority government without giving the left parties an opportunity to
form a majority government last month draw a great deal of
criticism.
Another wrinkle is that President
Silva, prime minister 1985-1995, is due to step down in January. He
was elected as President in 2006 and re-elected in 2011.
There was ostensibly concern that a left coalition would not be stable.
However, the subtext was that the left would antagonize the official creditors.
There are differences among the left, but there is a joint distaste for the
austerity that the creditors demanded in exchange for aid that Coelho
accepted. Still, the different agendas promise to erupt, and
potentially quickly. Costa wants to unwind some public sector wage cuts,
and bolster family income by taxing inheritance of more than 1 mln euros,
looking at changing the income tax brackets, and increasing the minimum
wage. The Left Bloc wants to restructure the country's debt while the
Communists want to prepare to exit EMU.
Today's developments are not a surprise. It has been a bit more
than a week in the making. Over the past five sessions, Portugal's
10-year bond yield rose 20 bp, the most in Europe. Portuguese equities
have also underperformed, dropping 4.6% over the past five sessions. In comparison,
the Dow Jones Stoxx 600 is off about 0.6% over the same period.
To be clear, Portugal not currently on an international assistance
program. This gives the official creditors less leverage than they
had over Greece. Still, if the EU chose it could sanction Portugal if it
misses its fiscal targets. The major rating agencies place Portugal
at BB+. Our proprietary model puts it at BBB-, just into investment
grade. From the ECB's point of view, that fact that DBRS has Portugal in
investment grade status is important. If DBRS were to cut Portugal's
rating, there is risk that the ECB concludes that Portugal no longer qualifies
under the asset purchases plan nor could the government bonds be used for
collateral for borrowings from the ECB.
Portuguese political developments need to be placed in the context of the
push back against austerity. Syriza in Greece, chastened by spring
and summer events, but is still struggling to meet the creditors demands for
the next tranche of assistance. Left of center governments are
in France and Italy. France seems to be pushing for yet more forbearance
from the EU for the 2016 budget target. Italy's problem is not the
deficit but the mountain of debt. Spain has elections next month, and
Prime Minister Rajoy also appears to be seeking a more sympathetic ruling by
the EU.
With the Fed now more widely seen
raising rates a fortnight after the ECB eases policy further at the start of
next month, the euro remains on the defensive.
Recall that during the Greek drama, the euro never revisited the March lows
(~$1.0460). In fact, it did not go back
below $1.08 until last week. Portuguese
developments may weigh further on Portugal asset markets, but the situation
seems far from a systemic threat.
Portuguese Politics Takes the Lightening Rod from Greece
Reviewed by Marc Chandler
on
November 10, 2015
Rating:
Reviewed by Marc Chandler
on
November 10, 2015
Rating:
