Portugal passes key bond test but domestic tensions rise

Portugal passed a key test of investor confidence on Wednesday with a successful bond auction, as eurozone financial markets eased, but domestic tensions remain high as austerity fatigue sets in.

Portugal, which is under an EU-IMF bailout programme, raised 2.0 billion euros ($2.6 billion) at sharply lower interest rates in the first auction since the country won an extra year from its lenders to bring its public deficit down to three percent of output.

The rates fell sharply with the country raising 1.29 billion euros for 18 months at 2.97 percent, compared with 4.54 percent in April, and 709 million euros for six months at 1.7 percent, down from 2.3 percent in July.

“This issue was a success and shows that investors have not been affected by the political situation in Portugal,” said Filipe Silva, an analyst at Carregosa bank.

Results of the auction largely reflected the recent trend on bond markets which have recorded lower borrowing rates for debt-wracked eurozone countries due to a decision by the European Central Bank to buy bonds of distressed members on the secondary market, subject to tough conditions.

Although financial pressure has eased, tensions in Portugal have risen over Prime Minister Pedro Passos Coelho’s pledge to take further cost-cutting measures, including a 7 percent rise in employee welfare contributions, equivalent annually to the loss of one month’s pay.

The discontent has reached a scale not seen since Portugal’s return to democracy in 1974, with not only the opposition but with business leaders also levelling strong criticisms against the government.

Massive demonstrations were held on Saturday in Lisbon and 30 cities across Portugal, with hundreds of thousands of people turning out to protest. The country’s main union CGTP has called for further mobilisation on September 29 in Lisbon.

Economic newspaper Diario Economico noted in an editorial that “Pedro Passos Coelho has managed to get the Portuguese unanimously against the government.

“There is just one solution to get out of the crisis: step back,” it added.

Discord is also apparent within the ruling coalition, with the foreign minister Paulo Portas openly opposing the austerity measures and demanding that budget cuts be renegotiated.

Even Portuguese President Anibal Cavaco Silva, whose office is largely ceremonial, has voiced worries and called a state council meeting Friday to discuss the situation.

Meeting deficit targets is key for Portugal to receive more funds under an EU-IMF rescue package negotiated last year worth 78 billion euros.

But the spending cuts and economic reforms required as part of the bailout have caused the economy to sink into a recession, with the economy shrinking by 1.2 percent in the second quarter, much faster than the 0.1 percent rate in the first quarter.

The contraction is expected to reach 3.0 percent for the whole year.

Passos Coelho is due to hold discussions with social partners on Wednesday before meeting his party in the evening.

The Portuguese media meanwhile has forecast drastic political scenarios, including Passos Coelho’s departure or early elections.