Portugal’s Prime Minister Pedro Passos Coelho’s coalition government continues to hold together despite tensions generated by the negative impact of austerity-fatigue on popular support for both the prime minister’s PSD and its junior partner, the CDS-PP. The partner’s resolve has been reinforced by signs of economic improvement, including a revival of tourism and exports that have contributed to a downward trend in unemployment and helped keep the deficit-reduction and debt-consolidation programs on track.

There are no signs as yet that the governing parties are benefiting as a result, but with the 18 months remaining in the current mandate, there is still time for the PSD and the CDS-PP to stage a comeback.  Portugal is scheduled to exit its $106 billion bailout program next year, after a combination of spending cuts and some successes on the privatization front helped to get the deficit-reduction program back on track in 2013. The narrowing of the budget shortfall will continue next year if the 2014 fiscal plan is fully implemented, in which case the public-sector debt ratio should begin to fall.

Several components of the 2014 budget proposal are sure to stir up popular antagonism.

However, several components of the 2014 budget proposal, including a 12 percent reduction in public-sector salaries exceeding $920 a month, a 10 percent cut in state pensions, and an increase in the civil service working week from 35 hours to 40, are sure to stir up popular antagonism, assuming they are not blocked by the Constitutional Court, which has previously quashed austerity measures deemed to contravene national law.

Barring a significant setback on the fiscal front, the results of a recent debt-swap operation suggest that investors are prepared to take a chance on Portuguese debt once again. Even so, an anticipated economic recovery will be weak and vulnerable to reversal in the event of further debt-related shocks within the euro zone. In that regard, Standard and Poor’s recent negative assessment of France’s debt situation, while more of a scolding gesture than an overt warning to that country’s creditors, should not be dismissed as insignificant.


The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.


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