June 6th, 2011
05:20 PM GMT
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A chill Atlantic wind rolled into Lisbon this morning, seen by some as a reminder of the tough times ahead for Portugal after last night's elections saw the Socialist party swept from power.

In his victory speech, Portugal's Prime Minister Elect, Pedro Passos Coelho of the Social Democrats, made it clear that the country should prepare itself for some serious belt-tightening. But he also told his electorate it would emerge stronger.

"We must have courage, we must have patience," he told crowds in one of Lisbon's main squares hours after the polls closed.

"We know the results will not happen in two days. It will be hard but it will be worth it."

Discussing the merits of the tough policies the new government has on the agenda is an irrelevant debate.

Portugal - and Passos Coelho for that matter - has little choice.

In the short term, Portugal needs to enact swift spending cuts and privatizations while in the longer term the country must also make wide-ranging structural reforms to the judiciary and education if the country is to re-establish its credibility on the international stage.

The reason why Portugal matters so much? Because the country was the third and last eurozone nation (so far) to go cap in hand to the International Monetary Fund, the E.U. and the ECB –often referred to as the "Troika." This after its growth and debt figures started moving in opposite directions.

Finance ministers of those countries within the monetary union have been crossing their fingers for months now, hoping that Portugal will be the 'line in the sand' beyond which Europe's sovereign debt crisis (now entering its second year) will not spread.

This means that the success of Portugal's new government in implementing reforms in return for $114 billion in financial assistance will be keenly watched by the world's financial markets and politicians alike.

So what is Pedro Passos Coelho inheriting and what are his plans?

Experts here in Lisbon acknowledge that things are likely to get worse for Portugal before they get better.

The country is experiencing its most pronounced drop off in activity since the 1980s with gross domestic product likely to shrink 4 percent over the next 2 years. Unemployment -already around 12.4 percent- will peak at 13 percent next year, while benefits for those out of work and pensioners are likely to be cut.

In a televised debate ahead of the elections, Passos Coelho said he "would not forget the 700,000 Portuguese out of work."

But finding jobs for the jobless will be tough while cutting back on the bloated public sector.

Passos Coelho has taken on a tough task indeed, and the figures speak for themselves.

After six years of Socialist rule during one of the worst recessions in a generation, Portugal has seen its debt balloon from around 68 percent of GDP in 2007 to a predicted 101% percent this year.

Passos Coelho wants to rein in the deficit to the E.U. ceiling of 3 percent, from a likely 5.9 percent this year. The capital city's public deficit alone will be slashed to 2 percent by 2013 from 7 percent last year.

"We must establish clarity and credibility," Passos Coelho told crowds last night.

"We are also determined not to be a burden on our international friends in the European Union and beyond."

If the bond markets are anything to go by, investors reacted positively to Passos Coelho's fighting talk, with yields on 10-year Portuguese government debt slipping to just shy of 9.73 percent as of this morning.

The test for Passos Coelho will be to keep financial markets and the IMF convinced that he is not only serious about meeting these targets but also that he has a strong enough majority to implement them. That's no mean feat amid talk of social unrest and staunch resistance to any mention of the word 'austerity.'

First up will be talks to sell off assets equal to no less than 3.5 percent of GDP. This could include privatizations of the power companies Energias de Portugal and Redes Energeticas Nacionais, as well as the national airline TAP Air Portugal.

Revenues would also have to be increased 1.4 percent, as part of the bailout terms. That's likely to mean higher taxes in a country were levies such as value added tax are already high by European standards – at 23 percent.

Nestled on Europe's Western-most frontier Portugal is a nation of navigators used to charting its own course in history. The country was the first to round Africa's Cape of Good Hope.

Last night it finally realised it will take more than that to ride out this economic storm, as its new leader is painfully aware.

soundoff (8 Responses)
  1. Barbara C

    Mrs. Dos Santos, thanks for your brilliant analysis. Structural reforms to the judiciary but also the tax system are indeed much needed in order to get Portugal's economy up and running. Portugal has fantastic assets such as its tourism sector, largely based on its rich regional heritage, a great health service and quality agricultural products. Not to forget the vast amount of Portuguese expats (such as my husband) many of whom have acquired outside experience of value to the country's business performance. However, without structural incentives to entrepreneurs in Portugal and abroad many of these assets will continue to underperform – or with a view to these expats – continue to stay beyond reach.

    June 6, 2011 at 6:18 pm |
  2. André

    Sad that it takes barely a generation to forget the failures of socialism. With such a short memory, even Communism might stage a comeback some time. We need less government, less "nanny state" interference in the initiative of people, less taxes used by the politicians to buy the votes of the lazy, the unproductive and the unsuccessful. It's time votes counts proportional to age, knowledge and tax paid. Technology has long ago surpassed the simplistic "one man one vote".

    June 6, 2011 at 7:40 pm |
  3. DDPortie

    Portugal made the right choice by choosing a right wing party. Left wing parties are just a 'democratic' way of giving money to lazy citizens.

    June 6, 2011 at 9:38 pm |
  4. Duarte

    In times like these, with unemployment and taxes really high, there is no government that is suited to overcome this crisis in Portugal. For this country, what should be best for it, would be international leaders with international experience, in order to fix all possible problems with a suitable team. Not just some cheap talker that does the same as the others have done. A person in Portugal has either two chances: or begins a new life abroad, or gets to spend his life in misery. This country deserves people with new mentalities, with new methods and new ways of dealing with problems, preferably international people.

    June 7, 2011 at 12:14 am |
  5. José

    You forgot to mention that Passos Coelho graduated from college when he was 37years old in a private faculty (one of the worst ones). Since very young, he is living a life based on its PSD connections. Right after he graduated he became a administrator of a big company of its mentor, a PSD member. Go figure...

    June 7, 2011 at 3:05 am |
  6. Ana

    Dear José of 3:05 am, I graduated from the University of Lisbon Law School when I was 38, because I had children I had to raise before I could study. Incidentally, I went to night school (worked during the day) because the University of Lisbon Law School has night classes, but I doubt the Faculty of Economics has night classes. In fact, most State Faculties don't. That is possibly the reason why he chose a private university. He possibly studied at night. As for this university being one of the worst, come on, where did you get this information from ? Lusíada is one of the best private universities in Portugal, second only to Católica.
    So, maybe he did things the other way around: just like me, started a family first, studied after.
    But who knows, by doing things contrary to most people in Portuguese politics he just might get it right you know? Stranger things have happened.

    June 7, 2011 at 12:54 pm |
  7. john leddy

    if i lived in portugal, i would have voted for cristiano ronaldo for president.all of the soccer fans, women and gay men would support his programs. and i would ask ricardo kaka to be his top assistant.

    June 12, 2011 at 12:15 pm |
  8. John E. Camacho

    To anyone out there, and this is with all due respect. But there are a couple of things that must be said. To Jose, does it really matter at what age, or whether the PSD itsefl totally supported and paid everything for Passos Coelho, if this gentleman fixes the economy of Portugal, would it really matter? Who would give a damn?

    Second, the problem of all these politicians who are so called "Socialists" do not understand or do not explain to the people that before any country becomes "socialist" that same country MUST be capitalist, Why you may ask? Because every single social program costs money and the only way to pay for them is trough income or GDP. No one explains this to the masses, because it is easier to pin the rich against the poor and harvest the votes. And the saddest part is that educated people still believes in such a non-sense.

    June 29, 2011 at 11:18 pm |

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