Sovereign debt crisis

Support for Sócrates and the Socialists eroded as Portugal weathered the global economic crisis throughout 2007–08, and in the 2009 parliamentary elections the ruling party held onto power but fell short of an absolute majority. Sócrates struggled to preserve his minority government as the Portuguese economy continued to spiral downward throughout 2010. As unemployment topped 10 percent, government efforts to stimulate the economy caused the budget deficit to skyrocket, and Portugal’s sovereign debt rating was downgraded by investment agencies. In response the Socialists passed a series of austerity measures in November 2010 that cut public-sector wages and increased the sales and value-added tax rates. Cavaco Silva was reelected president by a comfortable margin in January 2011, an event that was widely interpreted as an endorsement of stability and continuity, though fewer than half of eligible voters participated in the polling. Portugal’s economic problems persisted into 2011.

In March 2011 Sócrates’s proposal for a new round of spending cuts and tax increases (the fourth such austerity package in a year) was soundly rejected by the parliamentary opposition, prompting the prime minister’s resignation and setting the stage for a snap election. In early May Sócrates’s caretaker government and the EU and the International Monetary Fund came to an agreement in principle for a bailout of some €78 billion (about $116 billion). The agreement was contingent, however, on acceptance by the entire EU, which was less than certain, largely because of the opposition to bailouts expressed by the True Finn party, which had gained prominence in recent elections in Finland. In the June 2011 legislative election, the Socialists were defeated by the Social Democrats, who promptly secured a parliamentary majority by forming a coalition with the centre-right Social Democratic Centre–Popular Party (Centro Democrático Social–Partido Popular; CDS-PP). The new prime minister, Social Democrat leader Pedro Passos Coelho, vowed to implement economic policies that would not only meet the austerity guidelines imposed by the EU and the IMF but exceed them. Portugal saw its credit rating downgraded to junk status in January 2012, and the government responded with increasingly harsh cuts. The announcement of an additional round of tax hikes and public-sector layoffs triggered a wave of protests in October 2012 as demonstrators, facing an unemployment rate that topped 15 percent, expressed their weariness of austerity.

Political instability roiled the economy in 2013, with a wave of cabinet resignations pushing government bond yields toward an unsustainable 7 percent. Passos Coelho’s Social Democrats were trounced in local elections in September 2013, a clear sign of voters’ dissatisfaction with the government’s continuing austerity program. Nevertheless, Portugal was able to emerge from recession in 2014, and in May of that year, it successfully fulfilled its obligations under the terms of the 2011 bailout agreement. The economy had barely regained its footing when Portugal’s largest privately held bank, Banco Espírito Santo (BES), imploded in August 2014. Quick action by Portuguese officials restored calm, however; BES was nationalized, and its toxic assets were quarantined.

The governing centre-right coalition won the most seats in the country’s October 2015 parliamentary election, but it fell short of capturing a clear majority. Pres. Aníbal Cavaco Silva invited Passos Coelho to form a minority government, but it soon became apparent that it would not survive a vote of confidence. On November 10, after it had been in power for less than two weeks, Passos Coelho’s government was toppled by an opposition coalition of the centre-left Socialists, the Communists, the antiausterity Left Bloc (allies of the Greek Syriza party), and the Greens. Socialist leader and former Lisbon mayor António Costa was sworn in as prime minister on November 26. The Socialist-led coalition saw its first major setback in January 2016 when Marcelo Rebelo de Sousa, a founding member of the Social Democrats, was elected president by a resounding margin. Although the office of president was largely ceremonial, Rebelo de Sousa vowed to serve as a moderating influence and pledged to restore stability to the government.