3rd Oct 2022

Portuguese caretaker bail-out raises question of democratic legitimacy

The Portuguese caretaker administration of centre-left leader Jose Socrates Wednesday evening announced that it had requested financial assistance from the European Union.

After weeks of adamantly refusing that his country go down the path of Greece and Ireland, Socrates issued the announcement on national television, saying: "I always said asking for foreign aid would be the final way to go but we have reached the moment."

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  • PM Socrates: "I tried everything." (Photo: Vitó)

"I tried everything, but in conscience we have reached a moment when not taking this decision would imply risks that the country should not take," he said.

In a swift late-night response, the European Commission responded positively to the call for help.

In a statement, commission chief Jose Manuel Barroso said that any assistance would be "processed in the swiftest possible manner, according to the rules applicable."

A previously scheduled meeting of European Union finance ministers in Hungary on Friday will see the Portuguese situation climb the agenda.

As in the case of Ireland's €85 billion package and Greece's €110 billion sum, the European Central Bank and the International Monetary Fund are also likely to be involved in the deal.

Socrates did not mention a figure, but in recent weeks analysts predicting a bail-out have estimated that the country will need between €60 and €80 billion.

Lisbon was forced into the situation by the markets after the cost of government borrowing soared in recent days as a result of the fall-out of repeated downgrades in the state's creditworthiness by ratings agencies.

The agency behaviour in turn came in response to the failure of the government to push through additional austerity measures mostly affecting welfare, healthcare and pensions.

On 23 March, Socrates resigned after the new austerity bill was defeated after the right-wing opposition yanked away its support for the minority centre-left administration. A snap election is scheduled for 5 June.

The opposition Social Democrats, a conservative party despite its name, opposed the adjustment to austerity in the bill but now says it will back a bail-out agreement, although any memorandum of understanding with the EU-IMF-ECB troika is certain to require much deeper cuts and restructuring.

On Wednesday, the country went to auction managing to sell €1 billion in six-month and one-year bonds but at a rate of 5.11 percent and 5.9 percent respectively - rates little different to that which the EU troika would charge on a seven-year loan package.

On Monday, the yield on its five-year bond soared to 9.91 percent.

It has become significantly cheaper for Portugal to go to the EU and IMF with its cap in its hand than to go to market.

However, complicating the situation is the country's simultaneous political crisis, which raises questions about the democratic legitimacy of any bail-out agreement.

Until now, analysts have argued that a caretaker administration does not have the authority to enter into an agreement with international lenders.

In particular, the parliament, which has been dissolved, would have to ratify any package.

Politically, there are concerns as well. Brussels, Frankfurt and Washington risk signing up to an agreement that produces a backlash from voters, only to have to re-open the agreement for fresh negotiations after the June election.

There is also the simple question of how quickly a party that is in the middle of an election campaign can negotiate an agreement.

Nevertheless, the clock is working against such constitutional and political niceties and bankers have suggested the government could take out a ‘bridging loan' from EU states, to keep the lights on until after the election when a full agreement could be approved.

However these questions are resolved, unpopular austerity and restructuring has so far been the quid pro quo demanded by the eurozone's paymasters.

In the Portuguese case, the price of the country's products has long since been made uncompetitive in comparison with German unit costs. Locked into the eurozone, Portugal has been unable to devalue to address this problem, meaning that heavy private-sector wage constraint is almost certain to feature prominently in any bail-out deal.

Already the site of a massive anti-austerity protest last month, one of the biggest demonstrations since democracy came to Portugal in 1974, Lisbon is likely to see yet more unrest as a product of such a bail-out agreement.


EU officials were warned of risk over issuing financial warning

The European watchdog for systemic economic risk last week warned of "severe" threats to financial stability — but internal notes show top-level officials expressed "strong concerns" over the "timing" of such a warning, fearing publication could further destabilise financial markets.

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