Portugal’s largest political parties broke off talks to form a “national salvation” pact on Friday, unable to find consensus about how to proceed with the nation’s European bailout program.
The talks were suspended more than week after President Aníbal Cavaco Silva rejected a cabinet reshuffle that had staved off a coalition crisis and urged the ruling parties to find agreement with the opposition Socialists instead to enact further economic adjustments with broad parliamentary support.
The ruling conservative and liberal parties, however, easily defeated a no-confidence motion in parliament on Thursday and do not need the opposition’s support to continue their program. An Aximage poll released on Friday also showed a majority of Portuguese favoring Prime Minister Pedro Passos Coelho’s government staying in power over calling early elections.
The president’s intervention came after the junior coalition party, which commands 10 percent of the seats in parliament, had threatened to pull out of the government. Passos Coelho offered the party’s leader the deputy prime ministership and more influence in economic policymaking to placate his concerns about a widening budget deficit and rising unemployment.
Portugal’s deficit stood at nearly 10 percent of gross domestic product in 2010 when the Socialists were in power. Through spending cuts and tax increases, Passos Coelho managed to bring it down to 6.4 percent last year even as the economy contracted 3 percent. In the first three months of this year, however, the shortfall rose again to 7.1 percent.
Although the proposed cabinet reshuffle persuaded the conservatives to stay in government, the president unexpectedly called on all three major parties to form a unity government rather than accepting the deal.
The Socialist Party leader, António José Seguro, said on Friday that the coalition had rejected his proposal to renegotiate the terms of a €78 billion bailout, fearing that it would undermine Portugal’s credibility with investors and its lenders. The immediate sticking point was whether to go ahead with €4.7 billion worth of deficit reduction measures, he said.
“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 with President Cavaco Silva in Lisbon. He added that it was up to the president to decide how to proceed.
Cavaco Silva cautioned against early elections in a speech last week. Polls suggest that the Socialists should welcome them. While they initially supported economic and fiscal reforms to qualify for a European bailout, they have become increasingly critical of austerity measures as popular resistance also mounted.
The political turmoil has forced Portugal to request a delay in the eighth review of its bailout program which was due to start last Monday.
In March, Portugal’s European lenders gave it one more year to reduce its shortfall to under 3 percent of economic output, the treaty limit. The country’s economy is expected to contract another 2.3 percent this year, however, complicating the fiscal consolidation effort, while unemployment, which hit a record 16.9 percent in 2012, might climb to 18.2 percent.