Portugal crisis abates, but expected to return

LISBON, Portugal (AP) ? Portugal's immediate political crisis is contained but the country's president, Anibal Cavaco Silva, may have inadvertently pushed it further into political uncertainty and the possibility of another international bailout.

Following 10 days of political tension and suspense during which the coalition government come close to breaking up, Cavaco Silva sought Wednesday to restore calm by ruling out snap elections and keeping the current government in office.

Cavaco Silva's announcement ensured the country continues, for the moment at least, complying with the terms of the three-year 78 billion euros ($101 billion) rescue it received two years ago.

But it was what came next that raised concerns about how Portugal will survive beyond the bailout and whether the country, like Greece before it, may need a second lifeline.

In his presidential address Cavaco Silva asked the country's feuding political parties to surrender their political agendas and work on a shared medium-term economic recovery strategy. He also suggested the possibility of an early election in the middle of next year, but with the agreed economic strategy covering a period beyond that so as to ensure stability.

Investors are afraid the politicians may fail to find common ground on Portugal's economy and consequently pitch the country into chaos, or come up with a watered-down compromise plan that fails to reassure financial markets.

Either result could end in the country being unable to support itself financially and going back to its creditors for more help. That is precisely the kind of development the other 16 countries sharing the euro currency have long feared and fought to avoid after struggling for more than three years to escape their debt crisis.

Citigroup economists said in a note Thursday "the political crisis in Portugal is far from over." It added that "the president's proposal is likely to keep political uncertainty high in coming weeks."

The Lisbon stock exchange closed down 2.01 percent, at 5,423, Thursday while Europe's main bourses were higher. The interest rate on the country's 10-year bonds, an indicator of how risky investors see the country, crept up to 6.79 percent.

Portugal first had to go its fellow euro countries and the International Monetary Fund for help in 2011 to avert bankruptcy after investors, spooked by its high debts and low growth, stopped lending it money.

The bailout program runs out in a year's time. After that, Portugal needs to go back to markets ? where investors dislike uncertainty.

The three major international ratings agencies still classify Portugal's credit worthiness at junk status. And in 2014 and 2015 Portugal has to issue bonds worth 14 billion euros and 15 billion euros, respectively, to service maturing loans and bonds, according to its bailout creditors.

Despite two years of spending cuts and labor reforms demanded in return for the bailout, Portugal remains mired in debt and recession and with the burden of a 17.6 percent jobless rate. That kind of economic record is unlikely to endear it to lenders.

Any failure to stick to economic discipline once the loans end would also exclude Portugal from the European Central Bank's offer to buy the bonds of countries struggling with high borrowing costs. To qualify for the ECB program, the mere promise of which has already helped out Spain and Italy maintain their debts, a country must promise to reform their finances.

Portugal's fiscal health has improved over the course of its bailout program ? the deficit fell to 6.4 percent of GDP last year from 10.1 percent in 2010 ? but the sacrifices made are now at risk.

The chance of a compromise plan is slim. Austerity policies, such as pay cuts and tax hikes, have already split the two governing coalition partners and angered the main opposition Socialist Party, which wants to change course toward growth measures and is still insisting on early elections.

Coaxing the parties to overcome their differences won't be easy and could backfire by driving them further apart.

"This could go very well or very badly," Jornal de Negocios said in an editorial Thursday.

The three parties said they would consider holding talks, but their perfunctory responses demonstrated how they were stunned by the president's unanticipated proposal, which heralded what will likely be weeks of political jockeying for advantage.

One thing the head of state did seem to get right was catching the mood of the people, as the Portuguese increasingly express ill-feeling toward squabbling politicians.

The politicians "have to unite and to say yes" to the president's proposal, said Maria Luisa Sousa, who was selling fish at Lisbon's Ribeira market, next to the River Tagus. "It doesn't work if the parties pull one way and then the other. They cannot govern that way. We have to have faith now, we will see. It could work."

Market shopper Helena Antunes, 57, was less confident. "Our politicians have no class," she said. "Everybody knows they are the ones that sacrifice people, but they don't sacrifice themselves."

A protest erupted in Parliament when several dozen demonstrators in the public gallery yelled "Resign!" at lawmakers and threw down confetti of red and yellow cards, used in sport to signify admonishments.

Source: http://news.yahoo.com/portugal-crisis-abates-expected-return-142910792.html

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