Last updated: April 3, 2013 7:29 pm

Portugal market jitters over instability

Portugal’s stock market fell sharply on Wednesday as challenges to the government raised fears that instability could derail the country’s €78bn bailout programme and upset plans to regain access to bond markets.

Lisbon’s PSI 20 stock market indicator slid by 3.5 per cent, but bank shares tumbled by almost 9 per cent, as the centre-right government faced a confidence vote in parliament and prepared for a constitutional court ruling that could demolish its 2013 budget.

Over the past six trading sessions the stock market has fallen by more than 8 per cent, its biggest loss in 18 months, in what bankers said was a response to the uncertainty caused by the impending court decision, expected late on Friday.

The court is to rule on the legality of planned public spending cuts totalling about €2.5bn in a decision that could destabilise the government coalition and jeopardise deficit-reduction plans.

Rejection of tax increases and public sector pay cuts by the court would also undermine Portugal’s ability to make an extra €4bn in “permanent” spending cuts by 2015, potentially delaying disbursement of bailout funds by international lenders.

Pedro Passos Coelho, the prime minister, on Wednesday denounced a confidence vote tabled by the opposition Socialists, saying it could endanger the country’s efforts to regain full access to bond markets and negotiate more time to pay back bailout loans.

“By breaking with the government and calling for [early] elections, the Socialists are in effect saying they want Portugal to negotiate a second bailout,” he told parliament. “That is exactly want the government has a duty to prevent.”

The government has a comfortable majority in parliament and defeated the motion of no confidence by 131 votes to 97. But the challenge signals that the Socialists, who abstained in previous confidence votes, will no longer lend even tacit support to further austerity measures.

“April is set to be a turbulent month for Portugal, in terms of both political and economic events,” said Ricardo Santos, a London-based analyst with BNP Paribas. “Public patience with the government seems to be wearing thin”.

If the constitutional court decision goes against the prime minister, his “political room for manoeuvre will pretty much evaporate”, Mr Santos said.

Government plans to issue a 10-year government bond in an effort to regain full access to bond market funding could also be delayed if the court rejects contentious budget measures that amount to about 1.5 per cent of national output.

Tabled by the centre-left Socialists, the main opposition party, the confidence motion accuses the government of taking Portugal to the “edge of a social tragedy” through “aggressive ‘whatever-the-cost’ austerity measures”.

Mr Passos Coelho’s coalition has enough votes to survive the confidence vote, the fourth since he took office less than two years ago. But it is the first to be tabled by the Socialists, a mainstream party that negotiated Portugal’s bailout when in government before losing the June 2011 election.

“Portugal urgently needs a new government to renegotiate a credible strategy with Europe” aimed at stimulating economic growth and creating jobs, the confidence motion says.

This hardening in PS’s position comes at a delicate moment for the government as it finalises plans for €4bn in structural spending cuts to be phased in over the next three years.

In depth

Portugal bailout

Flag of Portugal

Portugal is the third eurozone country to seek EU financial assistance over crippling sovereign debt problems

Vítor Gaspar, finance minister, has warned that the troika of Portugal’s international lenders – the European Commission, the International Monetary Fund and the European Central Bank – could withhold payment of the next €2bn instalment of bailout funds until detailed proposals for the cuts are agreed.

The troika has called for a broad political consensus over the measures, which imply permanent changes to the way Portugal runs and finances public services.

However, António José Seguro, the Socialist party leader, has refused government invitations to discuss possible reforms, accusing the prime minister of seeking to dismantle parts of the public health and education services and introduce more private competition.

Lisbon is also this month awaiting a decision from eurozone finance ministers on its request to extend the repayment period for bailout loans that currently mature in 2016 and 2021.

Resistance from Germany and other northern EU members could mean Portugal will not win an extension for loans coming from the European Financial Stability Fund, the eurozone’s €440bn bailout fund, but only from the almost-defunct European Financial Stability Mechanism.

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