Euro Zone Crisis

Portugal finance minister resigns amid austerity fatigue

Gaspar widely blamed by Portuguese for painful tax hikes and wage cuts since the mid-2011 bailout deal

PUBLISHED : Tuesday, 02 July, 2013, 10:16am
UPDATED : Tuesday, 02 July, 2013, 10:16am

Finance Minister Vitor Gaspar, the architect of Portugal’s austerity drive under an EU/IMF bailout, resigned in a potential blow to its planned exit from the rescue programme.

Widely blamed by the Portuguese for the painful tax hikes and wage cuts since the mid-2011 deal, Gaspar said in his resignation letter he quit because of the growing erosion of public support for the adjustment plan.

His departure marks the biggest political casualty from the country’s debt crisis since the previous Socialist government collapsed in the spring of 2011 after it was forced to request the bailout. The centre-right Social Democrats have governed since then in a coalition with the rightist CDS.

Gaspar will be replaced by Treasury Secretary Maria Luis de Albuquerque, who helped engineer Portugal’s still fledgling return to bond markets earlier this year. Lisbon hopes to regain full market access by mid-next year when the bailout ends. Failure to do so may require a new rescue package and yet more austerity.

Portugal entered its third year of recession this year under the weight of deeply unpopular austerity which has undermined salaries, cut into welfare benefits and raised taxes sharply. Unemployment is at record highs of nearly 18 per cent.

“The risks and challenges in coming times are enormous,” Gaspar said in the letter addressed to the prime minister. “They demand cohesion in government. It is my firm conviction that my departure will contribute to reinforce your leadership and the cohesion of the government.”

Gaspar, a politically independent technocrat, had faced periodic criticism from the junior partner in the ruling coalition, including over the biggest tax hikes in living memory that were launched this year to meet the goals of the 78-billion-euro ($102 billion) bailout.

His departure comes shortly before the July 15 start of the next bailout review by Lisbon’s lenders, the European Union and IMF.

“It’s a very big blow to the programme at a very critical time. Gaspar’s reasons are the clearest indicator that the politics of bailout are rapidly souring,” said Nicholas Spiro, Managing Director Spiro Sovereign Strategy in London.

“The least we can expect is delays with the next review for the new minister to get the feet under the table. And market conditions are certainly not going to get better,” he said.

Portuguese bond yields were little changed on Monday, but analysts would not rule out a sell-off on Tuesday.

EU Economic and Monetary Affairs Commissioner Olli Rehn said he was confident Albuquerque would show “similar commitment and determination” to Gaspar.

Rehn, the top EU economic official, said in a statement that it was essential to maintain the pace of reform, but that he had no doubt Albuquerque would “ensure a seamless transition”.

The main opposition Socialists were quick to say the resignation was evidence of the government’s impending collapse and reiterated their call for a new election.

Analysts, however, said a snap ballot would be unlikely as the ruling coalition has the support of conservative President Anibal Cavaco Silva and a solid majority in parliament despite its record low popularity.

“A snap election is the last thing Portugal would need now, but I don’t see that happening,” Spiro said.

Antonio Costa Pinto, a political scientist at the University of Lisbon said “the tendency now would be for the government to diminish the austerity a bit, but whether it has margin to do so will depend on the European authorities”.

At the last review of Portugal by creditors, the country won an easing of tough budget goals and Prime Minister Pedro Passos Coelho has suggested he may request a fresh relaxation for next year if the economic outlook worsens.

Analysts said Albuquerque, like Gaspar, was a credible technocrat whose choice signalled continuity.

“In terms of external projection this is a bet on continuity, a way of minimising the damage done by the departure of a minister who pleased international partners,” said Filipe Garcia, head of consultancy Informacao de Mercados Financeiros.

Albuquerque recently led a complex process to renegotiate high-risk derivatives contracts sold to Portuguese state firms by banks which had amounted to potential losses of around 3 billion. The state has managed to reduce its liabilities, but has revealed little concrete data.

But she has been criticised over her previous role as the chief financial officer at one of the companies that had also contracted swap contracts. The government has denied those contracts were excessively risky and damaging.

Still, in a sign that her position may be weakened by the allegations, the opposition Socialists said the new minister’s “credibility is hurt by what the country already knows”.