Portuguese borrowing costs topped 8 percent for the first time this year after two ministers quit, signaling the government will struggle to implement further budget cuts as its bailout program enters its final 12 months.
Secretary of State for Treasury Maria Luis Albuquerque replaced Vitor Gaspar at the Ministry of Finance. That prompted Paulo Portas, who leads the smaller CDS party in the coalition government, to quit, saying the new minister would offer “mere continuity” of the country’s deficit-cutting plans.
Pedro Passos Coelho, Portugal's prime minister, right, greats Vitor Gaspar, former finance minister, during a swearing in ceremony for new government ministers in Lisbon on July 2, 2013. Photographer: Mario Proenca/Bloomberg
July 3 (Bloomberg) -- Portuguese Prime Minister Pedro Passos Coelho has lost his finance minister and foreign minister as the final 12 months of the nation’s bailout program collide with mounting austerity fatigue. Manus Cranny reports on Bloomberg Television's "Countdown." (Source: Bloomberg)
Maria Luis Albuquerque, Portugal's new finance minister, stands during a swearing in ceremony for new government ministers in Lisbon July 2, 2013. Photographer: Mario Proenca/Bloomberg
“It sounds the alarm bell of austerity fatigue,” said David Schnautz, a strategist at Commerzbank AG in New York. “This domestic noise is definitely negative.”
Portugal’s 10-year (GSPT10YR) bond yield jumped to 8 percent, up from as low as 6.35 percent earlier in the week and to the highest level since Nov. 27. That’s more than double the average interest rate of 3.2 percent charged for the aid loans.
Prime Minister Pedro Passos Coelho is battling rising joblessness and a deepening recession as he cuts spending and raises taxes to meet terms of a 78 billion-euro ($101 billion) rescue plan monitored by the European Union, the International Monetary Fund and the European Central Bank, known as the Troika. Coelho announced measures on May 3 intended to generate savings of about 4.8 billion euros through 2015 that include reducing the number of state workers.
“In the next few hours, I will try to clarify and guarantee with the CDS party all the conditions for the stability of the government and to proceed with the strategy of overcoming the nation’s crisis,” Passos Coelho said in a speech last night. He declined to resign and said he was convinced the parties would be able to overcome any differences.
“The grand bargain in the euro zone is that the strong, notablyGermany and the ECB, support the weak and that the weak accept the conditions attached to such support,” Christian Schulz, an economist at Berenberg Bank in London, wrote in a note following the Portuguese resignations. “If one country were to lose the political will to stay the course, tensions in the euro zone could rise again.”
Portugal has planned to return to the bond markets with the country’s aid package scheduled to end in June 2014. The nation sold 10-year bonds on May 7 for the first time in more than two years as a global decline in interest rates spurred demand for higher-yielding assets. Portugal had stopped selling bonds until this year after requesting the bailout in April 2011.
The difference in yield that investors demand to hold 10-year Portuguese bonds instead of German bunds has narrowed to about 635 basis points from a euro-era record of 16 percentage points in January 2012. The spread is higher than this year’s average of 461 basis points.
As Albuquerque “was directly involved in the return of Portugal to the market, the official line of the government for the markets and the Troika will be that the handover will be relatively smooth,” Ricardo Santos, an economist at BNP Paribas SA in London, wrote in note sent yesterday to clients.
Albuquerque, 45, worked at Portuguese debt agency IGCP before joining the government in 2011. As secretary of state, Albuquerque has overseen the debt agency and accompanied Gaspar to euro-area finance minister meetings.
“By choosing Gaspar’s number two, Passos Coelho wants to limit the reshuffle’s impact on the relationship of the government with the Troika and European counterparts,” said Antonio Barroso, senior vice president at consulting firm Teneo Intelligence in London. “The premier probably also wants to retain economic credibility, given that Gaspar had managed to build a solid reputation vis-à-vis financial markets.”
EU Economic and Monetary Affairs Commissioner Olli Rehn said in an e-mailed statement on July 1 that he was confident Albuquerque would “show similar commitment and determination” for the country’s adjustment program. It is “essential to maintain the tempo of reform,” he said.
A deeper recession and higher unemployment levels are “exacerbating social and political tensions and, in turn, testing the government’s resolve to continue with adjustment policies and reforms,” the IMF said June 13 in a staff report about the seventh review of the aid program.
“It’s my firm conviction that my departure will contribute to reinforce the leadership and cohesion of the government team,” Gaspar wrote in a resignation letter July 1 addressed to the prime minister and e-mailed by the Finance Ministry. “The risks and challenges of the near future are enormous. They demand government cohesion.”
Albuquerque will have to live up to Gaspar’s reputation among his European peers. “The former finance minister was widely respected in Brussels and Berlin, where he was seen as someone that was able to deliver,” Barroso said. His departure could undermine the country’s negotiations on the exit program, he said.
The EU may consider extending the deadline for Portugal to meet its deficit targets if economic conditions worsen, Jeroen Dijsselbloem, head of the group of euro-area finance ministers, said on May 27. Dijsselbloem said the government hasn’t yet requested another change of timetables and targets.
On March 15, the government announced less ambitious targets for narrowing the budget deficitas it forecast the economy will shrink twice as much as previously estimated this year. It 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. Portugal forecasts debt will peak at 123.7 percent of GDP in 2014.
Gaspar’s resignation shows the risk of reforms faltering, Organization for Economic Cooperation and Development Chief Economist Pier Carlo Padoan said yesterday at the Lisbon Council in Brussels. “Fatigue may suddenly erupt and the temptation to go backward may be very, very strong,” he said.