LISBON, Portugal - Portugal’s financial markets went into a nose dive Wednesday as the government teetered on the brink of collapse, alarming investors and reigniting concerns about the eurozone’s strategy for dealing with its prolonged financial crisis.
Prime Minister Pedro Passos Coelho defied calls to resign late Tuesday but he was running out of options to keep his center-right coalition government together after the resignations of two key ministers in a spat over austerity.
The resignations raised concerns that the junior party in the coalition government could pull its support. That would leave the government with insufficient votes in parliament to pursue the changes required to keep accessing the bailout loans. The funds are vital to avoid bankruptcy.
Portugal agreed on the $102 billion bailout program with its fellow euro countries, the European Central Bank and the International Monetary Fund two years ago.
Leaders of the 17 European Union nations that share the euro currency, known as the eurozone, have insisted on cuts in countries such as Portugal that have a heavy debt burden.
But the cuts have hurt the economy, eroded standards of living and drawn criticism from trade unions and business leaders. Portugal now is facing the likely prospect of austerity-inspired strife of the kind that has dogged Greece and compelled it to ask for a second bailout.
If Portugal doesn’t abide by the austerity program, its bailout creditors could halt the disbursement of funds,potentially leaving the country unable to pay what it owes.
That development “could trigger a sovereign default and potential removal from the eurozone, with contagion spreading across to Greece, a country that is currently struggling to secure its next tranche of aid money,” Ishaq Siddiqi of ETX Capital said Wednesday.
Portugal’s main PSI 20 stock index plunged 6.4 percent to 5,177 in late-morning trading Wednesday. Another indicator of investor confidence in a country, the inter-est rate on Portugal’s benchmark 10-year bond jumped 1.28 percentage points to 7.74 percent. The rate, which is what Portugal would pay to borrow 10-year money, is far above the 5.23 percent rate it hit in May but nonetheless lower than the 9.77 percent it was at this time last year.
Though the higher rates are not an imminent threat, since the government is not borrowing on bond markets but surviving on bailout loans, they reflect concerns the country will be unable to get back on its feet. It will have to bring the bond rates down by June 2014, when its bailout program ends.
The European Commission, the European Union’s executive arm, expressed “very serious concern” about Portugal’s unexpected political crisis, which flared up over 48 hours after two years of government stability. “The political situation should be clarified as soon as possible,” the commission said in a statement.
Jeroen Dijsselbloem, the president of the Eurogroup meetings of eurozone finance ministers, described the Portuguese upheaval as “disturbing” and said political stability in bailed-out countries is“a crucial factor” for recovery.
Holger Schmieding, an analyst with Berenberg Bank, said “Portugal is now the key event risk to watch in the eurozone.”
But he said Portugal’s European partners have been sympathetic to Portugal’s needs in the past, twice softening its annual deficit targets. Also, the economic contraction is slowing and unemployment has stopped rising.
“Some tweaking of the Portuguese program should be possible over time, helping Portugal to stay the course whatever the precise outcome of the political crisis,” Schmieding wrote in a research note. “We remain fundamentally optimistic, especially as the positive results of reforms are starting to show up in the economic data.”
Portugal still has a lot more budget cutting to do if it is to comply with the demands of the bailout agreement, which was signed by all three main parties.
Unions are fighting the government’s plans to increase the working time of state employees to 40 hours a week from 35; raise monthly pension deductions while lowering pension entitlements; and lay off some 50,000 government workers out of about 583,000.
Business, Pages 27 on 07/04/2013