sexta-feira, 7 de outubro de 2016

Portugal’s ‘contraption’ creaks forward

Portugal’s ‘contraption’ creaks forward
Stagnant growth, mountainous debt and a fragile financial sector are stoking fears of a second bailout.

By PAUL AMES 10/7/16, 1:37 PM CET Updated 10/7/16, 5:53 PM CET

LISBON, Portugal — A year after losing the election that brought him to power, António Costa has surprised many by still being comfortably ensconced as Portugal’s prime minister.

He’s dodged sanctions from Brussels over his efforts to turn the page on austerity and avoided rifts with the two hard-left parties that keep his minority government afloat.

His Socialist Party (PS) is sitting pretty in opinion polls — three to four points ahead of its main center-right opposition.

Yet the government faces major challenges from stagnant growth, mountainous debt and a fragile financial sector that are stoking fears Portugal could be forced into a second international bailout.

In elections last year, Costa was beaten into second place by the incumbent center-right coalition.

He responded by striking an unprecedented deal with the Portuguese Communist Party (PCP) and the radical Left Bloc (BE), forming a left-wing majority in parliament to back a Socialist government.

Naysayers predicted the love-in between the traditionally pro-Europe, pro-market PS and their Euroskeptic, anti-capitalist partners would soon fall apart.

Lisbon still faces a threat of cuts to its €3.5 billion in annual EU structural funding
The Right dismissed the alliance as the geringonça, a word that roughly translates as “contraption” and implies a complex but flimsy mechanism, barely fit for purpose.

The name has stuck. Even the Left uses it to refer to the alliance which is currently locked in negotiations to draft a 2017 budget that Portugal must present to the European Commission by October 15.

“It’s a contraption, but a contraption that works,” Costa gleefully told parliament earlier this year.

The PM is bullish about his ability to hold the alliance together, balancing leftist demands for a faster rollback of austerity with eurozone budget commitments and the need to revive the economy.

“The majority in parliament has proved itself over the year to be sufficiently solid, consistent and coherent to make this governing solution viable,” Costa said in an interview this week with the daily Público. “We’ve all understood that, with pragmatism, we can do things together even with our different identities.”

His task, however, is daunting.

Although the European Commission in July backed away from imposing fines over missed budget-deficit targets, Lisbon still faces a threat of cuts to its €3.5 billion in annual EU structural funding if there’s further slippage.

‘Alternative to capitalism’

At the beginning of the year, the government was forecasting 1.8 percent 2016 economic growth, now Costa admits it will “not be much above 1 percent.” The reasons include the impact on Portuguese exports of slowdowns in markets like Brazil and Angola.

Then there’s the banks. Portugal’s financial sector is burdened with over €30 billion in bad loans, holding banks back from investment needed to spur the economy.

Over the summer, the government had to paste together a €5 billion recapitalization plan to firm up the biggest lender, state-owned Caixa Geral de Depósitos.

The then third-largest bank, Banco Espírito Santo, went to the wall in 2014 and the government’s still struggling to find a buyer for its much-reduced successor Novo Banco.

Last year’s deficit overshoot was largely due to a €2.2 billion rescue of another ailing bank, Banif.

Costa remains sanguine as he heads off to China on Saturday for a five-day visit to whip up investment.

He insists Portugal will “comfortably” bring this year’s budget deficit below the Brussels-mandated deficit target of 2.5 percent of the gross domestic product. Although an IMF report made public Wednesday forecast deficits of 3 percent this year and next.

The government is aiming at below 2 percent next year, even with far-left demands for increases in pensions, wages and social services spending. Tax increases to hit the better-off may be part of his solution, including sales taxes on luxury items.

A possible new wealth tax on owners of property worth over €500,000 was announced last month by Mariana Mortágua, an influential Left Bloc lawmaker, who media commentators — only half-jokingly — refer to as the country’s real finance minister.

Mortágua’s apparent announcement of government policy was combined with an appeal to the Socialists to seek “an alternative to this capitalist system” and “lose any shame about claiming back from those who accumulate money.”

Her words triggered a backlash from centrist Socialists long queasy over the far-left alliance.

“It’s bad for the country,” Francisco Assis, a PS member of the European Parliament told the weekly Expresso newspaper. “It’s leading to paralysis. Any reform, no matter how modest is opposed, by the BE and the PCP. They are closed and conservative parties.”

Bailout worries

Outsiders are also concerned by the lack of reforms to free up the economy.

An IMF report last month complained that failure to reform was “a significant factor in the slowdown of investment.” It urged the government to overhaul labor markets, the judiciary and public administration and warned against any backsliding on the reforms undertaken by the previous administration.

“The good news is that popular support for the Socialist Party appears to be increasing quite steadily, this bolsters their hand in the negotiations with the Communists and the far left on having a responsible budget,” says Fergus McCormick, chief economist at the Toronto-based credit rating agency DBRS. “They are largely on track to make the deficit target for this year.”

“The worry is that Portugal will need a second bailout. I can’t tell you what the probability is, but it is higher than zero” — European Commissioner Günther Oettinger
“Our concern is more with the underlying problems holding back growth,” he told POLITICO, warning that much-needed reforms are being “constrained by politics.”

McCormick’s views matter. DBRS is alone among the four major international agencies still giving Portuguese bonds an investment rating.

If its next review on October 21 includes a downgrade to junk status, Portugal could be cut off from European Central Bank funding, forcing it to seek a second bailout that would likely come with even harsher terms than those imposed in return for the €78 billion EU/IMF rescue in 2011.

That prospect was raised this week by European Commissioner Günther Oettinger.

“The worry is that Portugal will need a second bailout. I can’t tell you what the probability is, but it is higher than zero,” Oettinger told a group of Portuguese lawmakers Monday. “I can imagine a second program to finance your budget.”

His warning provoked an angry rebuke from the government.

“Politicians — and that includes members of the European Commission — must use common sense and responsibility when they speak,” fumed Foreign Minister Augusto Santos Silva. “If we don’t know what we’re talking about, we shouldn’t comment.”

Portugal’s European Commissioner Carlos Moedas has contradicted his German colleague, telling a conference in Madrid Thursday that a bailout “is not on the horizon for any country in Europe and it does not exist at all in Portugal.” Analysts are divided, with the ratings agency Moody’s saying last month the likelihood of another bailout was low, while Eurasia Group warned such a scenario was “entirely conceivable.”

Costa dismisses bailout talk is “nonsensical,” insisting his government ‘contraption’ is guiding the country along a post-austerity path to recovery.

He must also be aware, however, that in 2011 the last Socialist prime minister José Socrates was fervently denying the country needed a bailout just 48 hours before markets forced him to request one.


Paul Ames  

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