LISBON (Reuters) - Portugal’s main political parties broke off talks on Friday on a “national salvation” pact to ensure an EU/IMF bailout stays on track, leaving it to the president to decide how to proceed.
Political turmoil has already forced Lisbon to request a delay in the eighth review of the bailout by its creditors, which was initially due to start last Monday, until the end of August or early September.
The 78-billion-euro ($102.5-billion) bailout program and attached austerity policies are associated with the worst recession in Portugal since the 1970s.
The leader of the main opposition Socialists, Antonio Jose Seguro, said the ruling coalition had rejected most of his party’s proposals aimed to renegotiate the terms of the bailout.
The crisis, which started as an internal political rift in the ruling coalition and expanded to a debate over the bailout plan, has threatened to derail Portugal’s planned exit from the bailout and full return to debt markets in mid-2014.
The government says abandoning austerity would undermine Lisbon’s credibility with lenders and investors.
“There were two different visions to exit the crisis. That being clear, it made no sense to continue negotiating for the sake of negotiating,” Seguro told reporters after meeting President Anibal Cavaco Silva.
Seguro said whether to go ahead with 4.7 billion euros’ worth of government-proposed budget cuts had been a major sticking point.
“Many of you ask yourselves, and now what? It is up to the president to decide,” Seguro said.
Analysts say the situation is very uncertain but the president could still avoid an escalation of the crisis by keeping the ruling coalition in place rather than using his power to dissolve parliament and call a snap election.
The rift in the coalition broke out in early July with two senior ministerial resignations.
It was followed by a U-turn that appeared to have healed the split, only to be shot down by the president who rejected a proposed cabinet reshuffle and called for a deal of “national salvation” to back the bailout policies and hold an early election after the end of the program in mid-2014.
“I find it very hard to believe that the president will go for a snap election now after he said so much last week about the danger of such a move,” said Marina Costa Lobo, political scientist at the University of Lisbon.
“What could be on the table is a government reshuffle, possibly different from the one proposed by the premier, or a government picked by the president,” she said.
The yield on Portugal’s benchmark 10-year bonds has fallen in the past few days to settle at 6.86 percent on Friday on optimism that the parties would strike a deal. They had reached nearly 8 percent last week when the president announced his surprise decision.
“Markets have given us a truce this week expecting a deal, gave Portugal the benefit of the doubt and this will be a big disappointment... the risk premium is poised to rise,” said Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto.
Antonio Saraiva, the head of the Portuguese Industry Confederation, which jointly with other business groups and the UGT labor union called for a political compromise earlier this week, said he did not see an early election as a good solution.
“It’s not safe to say that a more stable parliamentary setting will come out of that,” he said.
The government easily defeated a no-confidence motion in parliament on Thursday, which it then said confirmed its legitimacy to govern. Government officials were not available to comment on Friday night.
A poll by Aximage pollsters released earlier on Friday showed that 53 percent of more than 600 people surveyed last week preferred that the president keep Passos Coelho as prime minister, while calling an early election now was supported by a much lower 25 percent. ($1 = 0.7611 euros)
Reporting by Andrei Khalip and Daniel Alvarenga; Editing by Michael Roddy