Portugal Government Under Pressure

Rumors of a missed coupon payment in Ireland made the rounds and many now are down playing it. However, the problems in the periphery have not lessened. The real immediate focus is on Portugal. The government's new austerity measures will be debated tomorrow. All of the main opposition parties are opposed to the extra spending cuts that EU leaders so warmly praised.

If the opposition does reject the proposals, the minority government may collapse. The government forecasts the economy to contract by nearly 1% this year and the opposition parties are balking at new austerity measures. A collapse of the government, or even its precarious tenure, on the of the EU Summit on March 24-25 is particularly problematic.

We have expected that Portugal needs an assistance package, despite their denials. A collapse of the government would complicate this process as well as increase the likely costs to Portugal. While Irish yields are rising more than Portugal today, the Portuguese debt market and CDS are coming under strong pressure.

For its part, ECB officials are drawing a clear distinction between their liquidity measures and the conduct of monetary policy. Official rhetoric still encourages the market to look for an April 7 rate hike. On the other hand, the demands for austerity, without having senior bond holders participate in the "burden sharing" seems to be sparking a political backlash.

Most of the discussions of euro zone politics has focused on 1) the new Irish government and 2) German state elections, but in addition, Portugal as seen here, but also Spain have fragile governments and Finland goes to the polls next month and the more nationalistic and anti-EU party is moving up in the polls. In fact, it is doing so well that the government is balking at shouldering its share of the increase in the EFSF being forced about the few triple A countries in the euro zone.
Portugal Government Under Pressure Portugal Government Under Pressure Reviewed by Marc Chandler on March 22, 2011 Rating: 5
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