The death of Sócrates

In Ireland a bail-out by the euro zone’s rescue fund helped to force the government into calling (and losing) an early election. In Portugal an early election may force the government into accepting a bail-out. The question is: which government?

Tonight's defeat of the minority Socialist government, led by José Sócrates (pictured), in a parliamentary vote on austerity measures—the fourth such package in 12 months—triggered his prompt resignation as prime minister. But it also created a political vacuum in which nobody may have enough authority to negotiate a bail-out.

Few doubt that Portugal is close to the moment when it has no alternative but to seek assistance from the European Financial Stability Facility (EFSF), the euro-zone’s bail-out fund. But economists say that the crisis increases the chances that Portugal will need EU funds soon. Commerzbank predicts it will “increase pressure on Portugal to accept EFSF aid over the coming days”.

The austerity measures, which included a special tax of as much as 10% on pensions above €1,500 ($2,110) a month, were drafted with input from the European Central Bank and the European Commission as an “additional guarantee” that Lisbon would meet its fiscal targets. But Pedro Passos Coelho, leader of the centre-right Social Democrats (PSD), the main opposition party, refused to support them because they were aimed at “the most vulnerable”.

The PSD has a big lead in the opinion polls. And unlike Mr Sócrates, who has fiercely resisted a bail-out, Mr Passos Coelho is ready for one. That is because, as Antonio Garcia Pascual of Barclays Capital says, the PSD might not feel that it has much to lose from a bail-out if, as seems likely, the blame falls on Mr Sócrates's government instead.

It now falls to Aníbal Cavaco Silva, Portugal’s conservative president, to sort out the immediate future. The general election he is likely to call cannot legally be held for a minimum of two months; it will probably not happen before mid-June. Mr Sócrates would normally expect to stay in office as a caretaker (he was due to attend this week’s EU summit in Brussels, for example). But his powers to negotiate are limited. So Mr Cavaco Silva might call on all political parties to form an interim coalition. Or he could appoint a transitional non-party “technical government”.

Gilles Moec, head of European economic research at Deutsche Bank, says a “technical cabinet” would be better placed to negotiate a bail-out. But he argues that the Irish experience would probably deter other European countries from cutting a deal with a government that lacks the clear backing of its parliament. Portugal’s bond yields are already higher than at any time since the country joined the euro (see chart).

Yet Emilie Gay, an economist with Capital Economics, notes that Portugal’s budget deficit is lower than in most other troubled euro-zone economies. The country’s most serious challenge, she says, is to avoid “another lost decade” of low growth. Since the start of the euro in 1999 Portugal has been on average the slowest growing economy in the club, despite being its poorest member when it joined.

Ms Gay concludes that Portugal is likely to become the third peripheral euro-zone country to need a bail-out. Yet to overcome the deep-seated structural problems which have held back the economy will take not just rescue money but ambitious reform as well. The country’s need to issue debt is only €2 billion or so a month. Although that is small by most measures, and the government may have enough cash to meet redemptions in April, Portugal could struggle to last until June. Yet the markets are expecting action long before then. In mid-March Moody’s, a rating agency, downgraded Portuguese debt.

Portugal’s political turmoil and its urgent need for a rescue will create new problems at the EU summit, which is due to sign off on an effective expansion of the bail-out fund and a German-led “pact for the euro”. If EU leaders agree to bail out Portugal, they may find they have already used quite a big chunk of their fund. Judging by experience, the markets will then move on to attack the Spanish. The bail-out fund can easily finance Portugal. But it is not clear that it could deal with Spain.

[Economist, ontem]