Risks Mount Ahead Of Bailout Exit

BMI View: In light of recent protests staged by Portugal's various divisions of its security forces, we see mounting risks to the country's political stability. We outline three scenarios for Portugal's scheduled exit from its bailout in mid-2014, with all scenarios entailing continuation of help from the troika (ECB/IMF/EU) of international lenders for the foreseeable future.

Recent developments in Portugal have prompted us to re-evaluate our fairly sanguine outlook on the prospects for political stability in 2014. Whereas previously we considered the conservative coalition comprising the Social Democratic Party (PSD) and the Popular Party (CDS-PP) to retain its stable position in power for the duration of its four-year term, we now see mounting risks to the government's stability. The reason is that the approval of the 2014 budget plan on November 26, which envisions harsh austerity cuts, has been accompanied by an unprecedented level of protests, which could seriously destabilise the government.

Although protests against the country's harsh troika-mandated (ECB/IMF/EU) bailout terms have been on the rise over the past two years, what makes this wave of protests different is that various divisions of the security forces joined the protestors - members of the police, prison officers, and the paramilitary National Republican Guard. Although the police forces dispersed voluntarily shortly after occupying the steps of the parliament building, a place which is usually off limits to protestors, a repetition of the police forces' demonstration might see tensions escalate. Moreover, protests by the security forces signal that the government's grip over the use of force in the state is weakening, which might lead to further delegitimisation of Prime Minister Pedro Passos Coelho's Cabinet. Given these risks to stability, we outline three scenarios for the country's prospects of exiting its financial support programme scheduled for mid-2014 and its return to private financial markets.

Low Growth = Grim Fiscal Sustainability Prospects
Portugal - Real GDP, Budget Balance, % chg y-o-y

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This article is tagged to:
Sector: Country Risk
Geography: Portugal

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