Portuguese Spreads Soar As Cabinet Unravels, "There Are Reasons To Be Concerned" JPM Warns

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Following finance minister Vitor Gaspar's resignation, the foreign affairs minister Paulo Portas has just added to Prime Minister Coelho's problems and quit in light of who the PM chose as replacement for Gaspar. Gaspar was one of the key Portuguese policy makers to oversee the country’s bailout program, and in his letter of resignation, noted that he had lost the public's support to continue with the deeper-than-expected recession and above-target public deficit developments. Mr. Gaspar's replacement will be the current treasury secretary, Maria Luís Albuquerque, and that is what sparked the Portas to exclaim, "the Prime Minister decided to follow the path of mere continuity at the Finance Ministry. I respect that but disagree." Coelho is due to make a statement at 1900GMT but in the meantime, Portugal's bond market has spiked its most in 10 months relative to its risky neighbor Spain back above 200bps.

 

And here is JPM warning that the situation in Portugal may turn from bad to worse:

There are increasing reasons to be concerned about developments in Portugal, which has been the ‘forgotten country’ for much of the crisis. The announcement this afternoon that Paulo Portas, the foreign minister, has resigned significantly escalates our near-term concerns. Portas is leader of the CDS-PP, the junior partner in the two-party governing coalition. He has made a statement indicating that his resignation is one of personal conscience, and refusing to comment on the prospects for the Government. However, given his position, his departure will clearly have a significant impact.

 

The context is important here. We have flagged previously that there were dangers in the division between the two governing parties. CDS-PP has taken a strategy of disassociating itself from some measures which the Government has sought to implement, attempting to deflect blame onto the Prime Minister, Passos-Coelho, and the outgoing Finance Minister, Gaspar. There has always been a risk that the party would find remaining in Government too politically uncomfortable and seek to withdraw support when it sensed that the balance of its interests was shifting. What was needed was a proximate cause. We were worried that the Constitutional Court ruling on the Budget earlier this year may provide the spark, and have remained concerned about local elections in September. It is possible that Finance Minister Gaspar’s departure yesterday, and the reshuffle this week will prove to be the trigger instead. Portas has claimed that Gaspar’s departure opened an opportunity to explore a new path in terms of economic and fiscal policy, and that the Prime Minister has closed this opportunity by immediately appointing Gaspar’s deputy to the post.

 

At this stage it is still too early to tell how things will play out. These moves may prove to be about no more than tactical positioning, designed to highlight concerns about Alberquerque, the new Finance Minister, and to provide more leverage in a new Cabinet. In this scenario, we would expect the CDS-PP to use its moment of leverage to argue that Portugal should take a different approach ahead of the next Troika review on July 15th. There is some chance that the situation could be more serious however, and Portugal will be worth watching very closely in the next few days. The opposition Socialists have requested a meeting with the President for early afternoon tomorrow, and we may get more details from CDS-PP or the Prime Minister in the mean-time. If for whatever reason the CDS-PP were to withdraw its support, the Government would control only 108 seats in the 230 seat parliament. It would then need to either seek some broader coalition arrangement, or call new elections. At the moment risks appear elevated.