Portugal: Awaiting the economic and fiscal plans

After seven weeks of political impasse following the 4 October general election, President Cavaco Silva nominated the leader of the socialist party Antonio Costa to form a government. He will do so with the support from radical left groups: the Left Bloc, the Communist Party and the Greens have pledged their support to a socialist government. Together with the socialists, these parties have an absolute majority of MPs in the parliament, even though it is expected that none of them will join the socialist government.

For several weeks the markets have expressed concerns about political uncertainty and the possibility of a left wing government (supported by radical left), with sovereign spreads widening to over 200bp to the 10y Bund and c.90bp to Spanish Bonos. The anti-austerity rhetoric of the socialist party combined with some more radical proposals from the other left parties (such as the roll-back of some reforms, public debt restructuring and questioning EA membership) have created uncertainty about Portugal's economic outlook. 

While the more radical proposals seem to have been dropped (eg on public debt and euro area exit), it remains unclear to the market: 1) the capacity of the government to enact pro-growth reforms; 2) the size of the fiscal adjustment to be proposed by the socialist government; and 3) the public expenditure and revenue policies that will underpin the government's fiscal targets.