June 6th, 2011
05:20 PM GMT
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.
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