Daily Israel Report

Portugal's Political Crisis Makes a Bailout Inevitable

Prime Minster Jose Socrates' expected resignation means that there will be no government with power to impose austerity measures in the near term.
By Amiel Ungar
First Publish: 3/23/2011, 10:20 PM / Last Update: 3/23/2011, 10:41 PM

 

Portuguese Prime Minister Jose Socrates is approaching the end. He will not be drinking hemlock, as his namesake did, but merely losing the parliamentary vote on his austerity measures and then submitting his resignation. The opposition Social Democrats, who are to the right of Socrates' ruling Socialist party, are also in favor of debt reduction, but they are even more in favor of early general elections. This may ironically produce a grand coalition between the Socialists and Social Democrats.

Given the polls that favor the Social Democrats, it will be a coalition with them sitting in the driver's seat rather than propping up Mr. Socrates. Of course, the Social Democrats proclaim that they are not motivated by self-interest but patriotism. They believe that Socrates has to go because the government has been reactive to external pressure rather than reforming the country's finances on its own initiative.

The country's political turmoil almost certainly condemns Portugal to seeking a bailout, something that the government has attempted to ward off. Once Socrates has tendered his resignation and Portugal moves to new elections, there will be a lengthy hiatus until a new government is formed. The election process requires at least a 55 day prelude.

In the meantime, the financial markets will appraise the turmoil as proof that the Portuguese political elite is unwilling to administer the bitter economic medicine. Portugal's 10 year bonds were paying 7.77% interest while five-year bonds carried an 8.2% interest rate. Both rates of debt service are clearly unsustainable.

The good news for the euro zone is that the Portuguese weakness won't spread to the entire Iberian Peninsula.  Spain, for the moment, appears to have weathered its financial crisis of confidence and has returned to the bond market. The Spanish government has reached a pact with the trade unions and is selling off government assets to reduce debt. This contrasts with the situation in Portugal, that has witnessed social unrest and union walkouts including a rail strike. The workers are responding to a 11.2% unemployment rate that threatens to get worse,  with an austerity package combining higher taxation with lower spending.

Further complicating the predicament of the euro was the announced delay in setting up the souped-up and financially enhanced bailout fund. the European Financial Stability Facility (EFSF). The new pact was to have been announced this month, but the rollout will now be delayed to the end of June. The professed reason for the delay is to allow the member countries to make the necessary legal changes mandated by the new arrangement. The delay, however, also reflects disagreements that have not been settled.