Bailout beckons as Portugal’s Sócrates resigns

Try, try again… then quit. Portuguese Prime Minister José Sócrates stepped down late on Wednesday saying “today, I am convinced the country is lost,” after a last-ditch effort to push through new austerity measures and avoid a Greek-style bailout failed to win support in the Lisbon parliament.

The resignation of Sócrates and his minority centre-left government effectively pushes Portugal into the arms of the European Union and the IMF, with many analysts now saying that the debt-laden Iberian state can do little to avoid following in the footsteps of Greece and Ireland, both of which were bailed out last year when their bond yields reached unsustainable levels.

At around 7.8 percent, Portugal’s 10-year government bond yield is well above the 7-percent level which many analysts consider unsustainable in the long term. The five-year yield is even higher, and similar inversions in the yield curve were seen for Greece and Ireland before they sought bailouts. The collapse of the government is likely to push yields even higher.

Sócrates’ Socialist administration had hoped to prevent Portugal becoming the third EU state to need outside help. Just last month it remained adamant that Portugal could avoid such a fate, which revives the spectre of the IMF-ordered austerity the country endured in the 1980s.

“There are no reasons to think Portugal does not have conditions to keep tapping the markets. It’s quite the opposite,” Portuguese Cabinet Minister Pedro Silva Pereira assured in late February.

In order to assuage investors’ fears, the Lisbon government had put together a new package of austerity measures that included reforms to the labour market, trimming social benefits, lowering capital expenditures and scaling down state-owned businesses. That plan was roundly rejected by opposition parties, on which Sócrates’ minority Socialists rely for support, in parliament on Wednesday.

Playing political “games”

After the vote, Sócrates accused opposition parties of being “short-sighted” and putting their own political interests ahead of those of the country by thinking they could “win the game” by “bringing down the government.”

“Those who think like that aren’t looking at what is important… What happened today in parliament has nothing to do with me or with the government, but with the country – and today the country is lost, it didn’t win,” the prime minister said.

Though few Portuguese, who suffered a first round of austerity measures last year, have the stomach for more cuts in benefits and public services, the opposition centre-right Social Democrats’ decision to withhold support for Sócrates’ plan appears to be a carefully calculated political move.

Though Sócrates will stay on as a caretaker prime minister until a new government can be formed, elections – not due until 2013 – are now likely to be held early. Should the Social Democrats take power, they can easily blame any bailout on the previous government, something opposition leader Pedro Passos Coelho has already candidly indicated.

With €4.3 billion of bonds coming due on April 15, and a further €4.9 billion in June, the weeks before these redemptions would be logical times to seek a bailout.

Despite his resignation, Sócrates will still attend the EU summit in Brussels scheduled to start later today and continue into Friday where leaders hope to reach an agreement on a plan to increase the coordination of economic policy across the euro-region while expanding the size of the region’s bailout apparatus.

The Portuguese prime minister had planned to take his austerity plan to the summit as a sign that the country has its financial house in order. But in the aftermath of the failure to pass the measures, Sócrates’ ability to negotiate details of any potential bailout for Portugal will be severely restricted because of his caretaker status, driving Portugal into the arms of the EU and the IMF. And the austerity measures they will demand as part of any bailout may ultimately prove less palatable to Portuguese voters than what Sócrates had in mind.