Portugal: President Silva Pedals Back

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Includes: EWP, IEV, VGK
by: Acting Man

We Don't Need a "National Salvation" Government After All …

Did Portugal's president Anibal Cavaco Silva get a phone call from Brussels? The president made unexpected waves recently, when he called for the formation of a "national salvation" government following the resignation of two prominent ministers (one of whom has been reinstated in the meantime) from the government of Pedro Passos Coelho. Negotiations between the government and the opposition socialist party predictably failed (no common 'austerity' course could be agreed on), but instead of insisting on elections,

Silva now thinks it is more important that Portugal give the impression of being "governable":

“Portuguese President Anibal Cavaco Silva has backed the centre-right coalition government, ruling out snap polls to resolve a political crisis. He said "the best solution is to keep the current government in power".

This comes after Portugal's three main parties on Friday failed to agree on how to proceed with tough austerity measures. This raised fears the country would be unable to abide by the terms of its 78bn-euro ($102bn; £67bn) bailout. Some analysts have even suggested that the debt-laden nation would be forced to seek a second bailout.

Lisbon has had to request a delay in the eighth review of the agreed 2011 bailout by its creditors – the International Monetary Fund, the European Commission and the European Central Bank.

The review was due to start last Monday but has been put back until the end of August or early September. In a televised address on Sunday, President Cavaco Silva said: " I think in the current context of national emergency, calling elections is not a solution for the problems Portugal is facing."

He said he had given his support to the ruling coalition led by Prime Minister Pedro Passos Coelho, after receiving solid guarantees that the country would complete the bailout programme.

"It is important to show our European partners that Portugal is a governable country," the president added.

But he also demanded greater efforts to keep negotiation channels open with the opposition Socialists to avoid further political volatility.

(emphasis added)

This is an interesting interpretation of the situation to say the least. Elections equal an "ungovernable country"? It seems more likely that elections would crystallize popular opposition to current economic policies and would bring Brussels into a difficult situation. In poker lingo, Brussels is already 'pot committed', which means it will probably have to go all in, no matter what.

Both Portuguese government bonds and stocks seemed to receive the news well. It should be noted though that so far, the moves look very much like A-B-C type corrections, so the fat lady may yet have to sing in this case. A resolution should soon happen, so we won't have to wait very long to find out:


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Portugal, 10 year yield – an a-b-c correction? We will soon know – if it is one, yields should quickly turn up again.


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The recent activity in the PSI – 20 index also looks like a potential a-b-c type correction, however, note the "abandoned baby" circled above. This type of candle is usually bullish, as it indicates a very fast reassessment of the situation by the market.


Conclusion:

Portugal is a prime candidate for "going off the rails" at some point, as it seems increasingly difficult to stick with the troika imposed austerity program. Just as is the case in Greece though, the government's wiggle room – regardless of which party governs – is quite limited by the fact that it is essentially insolvent and hence dependent on the EU's bailout funding. By now it has probably dawned on a great many politicians in the peripheral countries that the euro really is akin to a roach motel: it was easy to get in, but it is fiendishly difficult to get out. If not for the EU-wide fetish for not shrinking the size of government under any circumstances, this would actually be positive for the peripheral countries. It forces them to adopt reforms, even if they are unpopular. However, there is also an unknown limit regarding what is politically doable. In Portugal, Greece, Spain and Italy that limit will probably be tested.

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