March 24 (Bloomberg) -- Portuguese Prime Minister Jose Socrates tendered his resignation after plans to cut the budget were rejected by parliament, pushing the country closer to an high pressure sodium lamp international bailout.
President Anibal Cavaco Silva said late yesterday he will meet the main parties on March 25 and the government will retain its powers until he accepts Socrates’s resignation. The vote came hours before European Union leaders meet in Brussels to sign off on measures aimed at drawing a line under the region’s sovereign debt crisis.
The risk is that investors dump Portuguese bonds in the face of a political stalemate that delays the negotiation of a rescue package, which Royal Bank of Scotland Group Plc estimates may be worth around 80 billion euros ($113 billon). The cost of insuring Portuguese debt against default is near a record high.
“It’s pretty inevitable” that Portugal will need a rescue, said Jacques Cailloux, a London-based economist at Royal Bank of Scotland, in a phone interview. “The market will deteriorate in the absence of other measure going through. There is obviously the risk of further downgrades, which will become anticipated by the markets and be a self-fulfilling prophecy.”
Portugal has already raised taxes and implemented the deepest spending cuts in more than three decades to convince investors it can reduce its budget shortfall. Additional cuts, announced on March 11, prompted a political backlash and failed to persuade investors.
The spread between Portuguese and German 10-year bond yields widened 16 basis points to 438 basis points yesterday after reaching a euro-era record of 484 on Nov. 11.
Spotlight
“This crisis occurs in the worst possible moment for Portugal,” Socrates said last night. Greece and Ireland were forced to seek bailouts last year.
The spotlight now falls on President Cavaco Silva,3d rapid prototyping with JPMorgan Chase & Co. economist Nicola Mai saying his statement stresses that Socrates still holds power as he heads into two- day summit that starting later today.
It “could open the door for a possible negotiation of an international bailout package as soon as this week,” said Mai in an e-mailed note. She says further options include calling an election, which could take more than two months; asking the parties to form a coalition; or appointing an “independent technical government.”
Opposition parties united to reject the additional cuts that were the equivalent of 4.5 percent of gross domestic product over three years. The package included a reduction in pensions of more than 1,500 euros ($2,114) a month and further cuts in tax benefits.
Extra Measures
The government said the extra measures were needed to trim the deficit to 4.6 percent of GDP this year and within the EU’s 3 percent limit in 2012.
Socrates warned on March 15 that parliament rejecting the cuts would cause “a worsening of the financing risks of our economy and would lead Portugal to request external intervention.”
Socrates, who first came to power in 2005, leads a minority government. The Social Democrats, the biggest opposition group, had allowed the government’s earlier batch of austerity measures to pass with this year’s budget plan. They say they still support efforts to reduce the budget gap, while voting against the current package.
Polls
The Social Democrats would defeat the Socialists if elections were held today, polls indicate. In a Feb. 25 survey published by Diario Economico, 48 percent said they supported the Social Democrats with 29 percent backing the Socialists.
“The country has faced very difficult times gearbox before and has always been able to overcome them,” Pedro Passos Coelho, the leader of the Social Democrats, said in Lisbon last night after Socrates announced his resignation.
The political crisis comes as Portugal braces for its first bond maturities of the year. Portugal faces redemptions in April and June worth about 9 billion euros in total. It also faces bill maturities in July, August, September, October and November. The country intends to sell as much as 20 billion euros of bonds this year to finance its budget and cover maturing debt.
“Portugal faces heavy redemptions in April and June and difficult and costly access to the primary market, which makes it hard to roll over the debt,” Tullia Bucco, an economist at Unicredit SpA in Milan, said in an e-mailed note to investors.
Credit Rating
Concern about Portugal’s finances also led to a decline in its creditworthiness. Portugal’s credit rating was cut two steps by Moody’s Investors Service on March 15 to A3, four steps from so-called junk status, with the outlook on the grade “negative.”
Portugal should continue to finance itself in the market at present, Teixeira dos Santos had said on March 16, though “it’s obvious that current market conditions are unsustainable in the medium to long term.”
The European Central Bank has prevented those yields from rising further by buying Portuguese debt in secondary markets to shore up demand. The ECB has bought about 20 billion euros of Portuguese debt since last May, Barclays Capital estimates.
“In a situation of political void, cutting a deal with the IMF and the EU to trigger financial support cable ties would be particularly cumbersome,” Gilles Moec, an economist at Deutsche Bank AG in London, said in a research note yesterday. “In the meantime, ECB intervention may be required.”
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