July 4, 2013 / 3:01 PM / 4 years ago

Fitch: Portugal Resignations Show Political Risk to Adjustment

LONDON, July 04 (Fitch) The resignation of Portugal's finance minister and the tendered resignation of the foreign minister this week highlight the political and implementation risks to the country's adjustment programme, which Fitch Ratings cited as reasons for maintaining our Negative Outlook on the 'BB+' sovereign rating when we affirmed it last November. Prolonged political uncertainty that hampered policy formation and execution, or material underperformance of Portugal's fiscal and external adjustment, would put pressure on the country's sovereign ratings. Our base case remains that programme implementation will stay on track. The appointment of Maria Luis Albuquerque as the new finance minister suggests a desire by Prime Minister Pedro Passos Coelho for economic policy continuity. Albuquerque has been a strong advocate of meeting programme targets through the policies of her predecessor, Vitor Gaspar, who resigned on Monday. More significant is the subsequent move by Paulo Portas, leader of the CDS party, the junior coalition member, to offer his resignation in response to Albuquerque's appointment. Prime Minister Coelho refused to accept Portas's resignation, and Bloomberg reported on Thursday that the two would meet to discuss securing a "viable solution" for the coalition government. A CDS spokesman was reported on Wednesday as saying that the two other government ministers from the CDS party would not leave the government. Opposition parties have called for early general elections. The final political outcome remains uncertain. Since our affirmation in November, the Portuguese authorities have kept the country's EU-IMF programme on track even in the face of significant institutional hurdles, such as April's Constitutional Court ruling that elements of the government's fiscal consolidation plans were unconstitutional. In May the government attempted a further shift towards cutting expenditure rather than relying on revenue-raising measures, with a four-year package of spending cuts. Implementing the programme has helped reduce the current account deficit and improve external competitiveness. However, the scale of the adjustment needed to maintain primary surpluses and restore fiscal sustainability meant that political disagreement over fiscal and economic policy was always possible. This week's developments increase the risk that programme implementation goes off track, although this is not currently our base case. If the government survives, it will have to endure periods of potential instability, for example around local elections due in September. If early elections were called, the resulting government of one or more mainstream parties would be likely to remain engaged with the Troika, although it might seek to renegotiate some elements of the current programme (as also advocated by CDS leader Portas). Both the CDS and the main opposition party, the Socialists, signed up to the original three-year support package in 2011. However, the risk of deviation from programme targets, which may have implications for public finances and therefore potentially for the ratings, would rise. The political crisis has pushed Portuguese sovereign bond yields higher, upsetting the sovereign's plan to fully re-enter the bond markets. Our existing assumption that Portugal will need further official support remains. The 'BB+' rating is underpinned by our assumption that this support will be forthcoming. Contact: Michele Napolitano Director Sovereigns +44 20 3530 1536 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Douglas Renwick Senior Director Sovereigns +44 203 530 1045 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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