Portuguese Bond Yield Spikes to 8% as Portugal’s Coalition Splinters on Austerity Fatigue

Action has heated up in Portugal where the Ruling Coalition Splinters on Austerity Fatigue.

Portuguese borrowing costs topped 8 percent for the first time this year after two ministers quit, signaling the government will struggle to implement further budget cuts as its bailout program enters its final 12 months.

Government Tensions

Social Security Minister Pedro Mota Soares and Agriculture Minister Assuncao Cristas will hand in their resignations to Coelho today, broadcaster TVI reported on its website last night, without saying how it obtained the information. Both ministers are from Portas’s CDS party.

The EU may consider extending the deadline for Portugal to meet its deficit targets if economic conditions worsen, Jeroen Dijsselbloem, head of the group of euro-area finance ministers, said on May 27. Dijsselbloem said the government hasn’t yet requested another change of timetables and targets.

On March 15, the government announced less ambitious targets for narrowing the budget deficit as it forecast the economy will shrink twice as much as previously estimated this year. It targets a deficit of 5.5 percent of gross domestic product in 2013, 4 percent in 2014 and below the EU’s 3 percent limit in 2015, when it aims for a 2.5 percent gap. Portugal forecasts debt will peak at 123.7 percent of GDP in 2014.

Gaspar’s resignation shows the risk of reforms faltering, Organization for Economic Cooperation and Development Chief Economist Pier Carlo Padoan said yesterday at the Lisbon Council in Brussels. “Fatigue may suddenly erupt and the temptation to go backward may be very, very strong,” he said.

Portugal’s Prime Minister Won't Step Down

The Financial Times reports Portugal’s Passos Coelho pledges to stay as prime minister

Portugal’s beleaguered prime minister has pledged to stay in office and seek to establish a stable government despite the resignation of two key ministers and the threatened break-up of his ruling coalition.

Pedro Passos Coelho said on Tuesday night he would stay at his post and work towards a “rapid return to stability” to avert a political and economic crisis that would endanger the country’s €78bn bailout.

“I will not resign or abandon my country,” Mr Passos Coelho said.

However, opposition parties called for an early general election two years ahead of schedule, saying there was no possible solution for the governing coalition.

“The country needs a new government with democratic legitimacy,” said António José Seguro, leader of the centre-left Socialists, the main opposition party.

The prime minister was speaking hours after his government was rocked by the resignation of Paulo Portas, foreign minister, less than 24 hours after Vítor Gaspar had quit his post as finance minister.

Mr Passos Coelho said he had refused to accept the resignation of Mr Portas, leader of the conservative Popular party (CDS-PP), the junior partner in the two-party government coalition.

The government of Portugal is now burnt toast. There is no way it can survive. But will any other government do what is needed (default and tell the EU where to go)?

Eventually some country will, as soon as the pain is severe enough.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com