Prologue

To understand this story one has to go back to 2009. The Socialist Party (PS - member of the PES) has the majority of seats at Parliament supporting the Government of José Sécrates since 2005. The credit crisis is hitting some sectors hard, especially Construction, and unemployment is rising fast. But it is an election year and measures to equilibrate the budget with declining tax income and increasing welfare expenses plus a Bank bailout are left aside. In spite of having his name linked to a few scandals, José Sócrates leads the PS to another victory, only this time without a parliamentary majority.

Negotiations unfold for a new government. At his left José Sócrates has the Left Bloc (BE) and the Communist Party (PCP), both members of the GUE; to his right lay the Social Democrats (actually an half liberal, half conservative party member of the EPP) and the Popular Party (CDS, also EPP). An impasse settles but to the astonishment of many, the President eventually calls the PS to form a minority support government on its own. Such option proved viable once in the past, but likely the recipe for disaster considering the national and international economic framework.

Dragging well into 2010, the new Government finally settles a deal with the CDS to approve a budget for that year. Son after the bombshell statistic comes: the budget deficit in 2009 soared to over 9% of GDP; the pressure on Portugal's sovereign debt starts mounting. Still in March of 2010 a package of austerity measures is announced by the government; another would follow in June, and another still in October. Leaving the adjustment to the last minute, the government is left only with short term measures such as VAT hikes and outright wage cuts.

With a new leader elected, Pedro Passos Coelho, the PSD starts to feel the heat of being the largest party in opposition to a minority government that can't exactly fail. During the first months of 2010 things seem to be evolving well between the two major parties, but when in September they start negotiating the 2011 budget the personal relationship between José Sócrates and Pedro Passos Coelho collapses and the doubt is cast on the viability of a budget. The impasse drags, Passos Coelho is between a bad place and a rock, either votes against the budget, launching the country into further economic uncertainty, or lets another package of unpopular austerity measures pass; meanwhile interest rates on 10 years bonds go beyond the unheard level of 6%. In face of ending as the bad guy no matter what, the PSD eventually abstains in the voting, thus approving the 2011 budget.

But the pressure on the Portuguese sovereign debt keeps mounting, the 2010 budget execution is not convincing and the rating agencies exert their power. With Greece already tapping the European Stabilization Fund (ESF) and Ireland negotiating to do the same, Portugal is the last in line before the bond vigilantes go after Spain, a state that's not exactly bailable. The heavy penalties it imposes and a relatively small dimension    also casts doubts on the effectiveness of the ESF itself, which only adds lumber to the fire. The ECB is buying ever larger amounts of Portuguese bonds, but interest rates creep up above 7%, a limit previously referred by the government beyond which it would tap the ESF. Instead, Portugal goes into 2011 still on its own, rolling its debt to ever lower maturity bonds, thus keeping average interest rates below 4%. The result is ever more frequent auctions for ever larger figures. With Ireland already tapping the ESF and interest rates on Spanish, Italian and Belgian bonds creeping up, several decisive auctions take place in January where the ECB intervenes heavily, impeding further escalations. An interesting tactic is adopted: Portugal goes on the market on Wednesdays, with the ECB helping, it becomes a mild success, Spain and Italy then auction their debt on Thursday, which propped by the good results of the previous day also succeed. Someone characterizes Portugal as the little boy with the finger in the dike.

This tactic, coupled to the willingness of the EPP leaders to reinforce and reinvigorate the ESF, finally succeeds, with interest rates easing on every state except Portugal. In spite of an announced better than targeted 2010 budget execution (below  7% of GDP) a sovereign debt of some 90% of GDP of ever decreasing maturity and ever increasing interest rates seems unsustainable; the markets scream: ESF!

And thus March of 2011 arrives. Portugal can no longer hold the dike on its own, negotiations with the EPP for the ESF upgrade are also the negotiations for the Union's aid.

March 2011, a log

2nd

José Sócrates flies to Berlin with the Minister of Finance to negotiate directly with Angela Merkel, in what is seen by some internal sectors as an act of pure subservience to another state. Nothing objective is provided to the press on the contents of this meeting, but at this distance it is not hard to have some plausible idea of what happens. Essentially, the EPP had previously agreed to improve the ESF, but commitments have to exist from everybody; for Portugal in particular the 4.3% of GDP budget deficit target for 2011 has to be accomplished. With oil prices escalating, GDP projections underpinning the budget seem now totally unattainable. More austerity is the answer, but if the new ESF comes to be then it can buy Portuguese debt directly without a formal aid request; in the short term this may not represent immediate interest rates reductions, but mid term it will be better than the high fixed rate agreements struck by Greece and Ireland. It's a whole game of chess, but in all likeliness an agreement of this sort between Jośe Sócrates and Angela Merkel is settled this day.

6th

The PES meets in Greece to present an alternative economic strategy to that being laid out by the EPP, which controls all major European institutions: Parliament, Commission and Council. The PES points to further solidarity between states, to easy the austerity on those states with fewer means, and the creation of an European Treasury, a new institution to single side deal with the markets and their minions, the rating agencies. José Sócrates is absent, clearly breaking ranks with the PES and signalling total synchrony with the EPP.

9th

Elected in late January, Aníbal Cavaco Silva is sworn in for a second term as President. Part of the protocol is a speech to Parliament with all major state figures present. It is one of the harshest speeches ever produced by a President in the modern democratic Portugal, in total opposition to the economic course trailed by the Government. There's also a call on young citizens to make themselves heard, taken as an explicit endorsement to a major youth protest taking place days later. It is the sort of speech to expect from a President that intends to sack the Government, but onwards, Cavaco Silva simply casts himself to silence.

10th

A Censorship Motion is presented at Parliament by the BE. This is a special resolution that, if approved, implies the immediate sacking of the Government, in consequence of which elections must be set by the President. Only the GUE members vote positively, the PS votes against and the EPP members abstain.

11th

José Sócrates is at the Eurogroup meeting that is finishing the new ESF and its rules. In Lisbon, the Minister of Finance makes a storm announcement of a new austerity package to reduce the budget a further 0.8% of GDP, including things such as freezing the lowest pensions. Later dubbed by a prominent PS figure as the "most disastrous political announcement ever taking place in the northern hemisphere", it seeds the confusion on the extent to which Portugal is bounded to the package and its exact content (contradicted in subsequent declarations). But above all it creates a huge malaise in the Portuguese political scene, for this package was supposedly unknown to all other parties and even to the President, contrary to what would be expected from a minority government. Over that, it casts doubts on the 2011 budget execution.

Later that day a joint communication by the Commission and the Council applauds this new austerity package. By then both the GUE and EPP members in Portugal had already declared intentions to vote against it at Parliament.

12th

200 000 people hit the streets in several cities of Portugal crying against the eroding economic setting. Supposedly, it was started by a group of independent youths as a movement to expose the precarious working conditions or even unemployment most of their generation have been cast in the wake of the economic crisis (note: the author is one of these) but it grows to a multi-generation protest. The success of the protest is largely a product of its declared independence from political parties, a serious display of the common citizen's  loathing of politics. Nonetheless, propaganda issued by the youth section of the PSD is prominently used throughout the protests.

15th

Faced with the reluctance of the whole of the opposition to accept the new austerity package, José Sócrates makes a storm appearance on a TV interview. He declares the package is not closed and opened to negotiation, what is bounding is the deficit target. He asks for alternative measures from the opposition if those proposed are not to their licking. Dramatizing, he also makes it clear that with the rejection of the package governing becomes impossible and elections must take place. In perfect synchrony, a rating agency slashes once more the rating of Portugal's debt, precisely during the TV interview. Portuguese sovereign bonds are now just two notches above junk. Interest rates on 5 year bonds pierce over 8%.

17th

The government announces a 800 M€ surplus for the February budget execution. It thus becomes clear the new austerity package was imposed by the EPP as counterpart for access to the soft version of the ESF.

21th

With every attempt of negotiation failing, the government presents the austerity package at Parliament. Pedro Passos Coelho and other figures of the PSD are openly talking of elections. Jean-Claude Junkers declares there's no margin to reject the targets set in the package.

23th

Four different resolutions against the austerity package are presented at Parliament by each party in the opposition; all of them are approved. Immediately after the Prime Minister presents his and his government's resignation to the President.

The Plot

Making sense of these events is close to impossible. In essence, the EPP rejected at the Portuguese parliament what it had imposed at the Council. In their urge to cast aside José Sócrates' government, the Portuguese EPP members refused an agreement to tap the ESF in conditions considerably more favourable than those by which Greece and Ireland accessed to it. Overthrowing the government this way is both prejudicial to these parties and Portugal, no logic can justify it. If the PSD and the CDS wanted to oust José Sócrates, why didn't they approved the censorship motion presented on the 10th? If they thought the actions of the government compromised the regular political functioning of the state, thus making its continuance impossible, why wasn't presented an alternative package that could sustained an agreement to tap the ESF and quell the bond vigilantes?

The alternative interpretation is believing that Passos Coelho and the major EPP leaders, Merkel, Sarkozy, von Rompuy and Barroso conjured to cast aside a PES member at the Council. Even in that case, both the timing and the format are too awkward, with important negative consequences for all. If indeed Passos Coelho broke rank with the EPP, then he casts Portugal to a very week negotiating position at the Council.

The Actors

José Sócrates is pretty much politically dead. With his name linked by the press (though not by the courts) to two corruption scandals and being the face of the worst economic period the state lived since it joined the EU, the road is ending for him. Never able to properly relate with any of the multiple PSD leaders during the time he was Prime Minister, many times showed to lack the negotiating flexibility for the occasion. The autistic way in which the austerity package was agreed and presented begs the question if he didn't actually desired the present crisis.

Pedro Passos Coelho is to a great extent a political nobody. Without any achievements or relevant offices in his political record, and much less in his professional carer, he came to be the PSD leader after the fast burnout of several leaders. Throughout the time he was in opposition he showed great difficulties with political tactics, letting José Sócrates cornering him several times. He largely misunderstood the role the largest opposition party should have in the complex situation he faced, neither partnering with the government nor presenting a credible and prompt alternative. The fact that José Sócrates was simply transposing the EPP economic policy to Portugal was a huge obstacle to a centre-right alternative that he never managed to deal with. In another display of poor political tactic he poses himself to be the prime minister assuming office in the most difficult conditions since the 1974 revolution.

Aníbal Cavaco Silva is, perhaps discretely, another major culprit of the present crisis. His major mistake was accepting a minority government in 2009 in face of an economic crisis with strong structural roots. After actively seeking compromises at Parliament to support the 2011 budget, he promptly changed tone once he got elected to a second term, lighting the fire and passively watching the state burn.

In the past weeks none of these men seemed to have acted with the best interest of Portugal in mind.

Scenes from following Acts

To understand how critical the resignation of José Sócrates and his government is, a few more things about the Portuguese political system must be know. With the resignation, the executive becomes unable to produce any sort of relevant political act. It is termed a Management Government, which is only able to guarantee the minimum functioning of the state; it can't, for instance, perform international agreements or adjust the budget. The Constitution now obliges to a 55 day period before the election of a new Parliament, and a new government isn't immediately sworn in. Hence Portugal can only have a proper government by July the soonest.

The implications in the short term are already huge. The Council meets tomorrow for what was supposed to be the final agreement on the new ESF. Can the ESF be enacted without Portugal's commitment? Will the other members of the Eurozone move forward and leave Portugal behind? In case the new ESF fails to be, what happens to the sovereign debt in Spain, Italy or Belgium?

On another plane, expect the rating agencies to cut Portugal's rating down to junk in the blink of an eye. By mid April the Treasury has to auction 4.5 G€, and another 5 G€ by June; the probability of these auctions succeeding is slim at best. What happens when a bond auction fails while a management government is in office? It can't claim foreign aid or do any sort of negotiation to that end, what then? Is any of the bright minds that produced this crisis reflecting upon this?

Thinking ahead on the election, the probability of the PS winning again is zero, but the PSD won't have a majority either, especially for the ensuing period of management governance will provide plenty of space for Pedro Passos Coelho to be attacked as the culprit of the crisis. Can he get a majority support at Parliament? What if he doesn't?

This whole scenario is shaping as a serious test to Europe and its present governance. Will the Council simply assist to the Portuguese default, or act promptly? Can the €uro survive to a member state default? Can the ESF outright bailout Portugal directly buying its debt bonds at the coming auctions? Can the EPP leaders explain such measures to their electorate? The EPP has some though choices ahead.

Epilogue

No matter how wrongly the individuals here referred have acted, one must remember they were are all legitimately elected. Portuguese folk especially should take a moment to reflect upon the sort of leaders they have chosen lately.

 In ancient Greece the theatre would usually end like this, with a single conclusive sentence, but before I go a few personal thoughts. I'm going to bed tonight with a great deal of concern. First of all because Portugal is becoming a real tough place to live in; I'm one of the precarious workers referred above, now almost 2 years working without a contract. This crisis is a serious step back for a state that had never quite been there. And secondly because at the European scope the consequences can be profound. This comes at very bad moment, right when things seemed to be going somewhere. The outcomes can be so broad reaching and unpredictable that for the first time I fear the present Confederation-like model may not be up to it. March isn't over, may the European leaders have the vision the Portuguese lack.