Asset quality on the mend in Portugal, despite political uncertainty

President Aníbal Cavaco Silva in the week of Oct. 19 appointed Conservative Prime Minister Pedro Passos Coelho for a second term, despite inconclusive elections in October in which no single party obtained a parliamentary majority. Some view the president’s decision as impeding the will of the electorate in order to adhere to austerity policies, The Wall Street Journal reported, while asking whether Portugal was set to follow Greece into leftist opposition to eurozone rules and severe political disruption.

But, according to a risk analyst at IHS Global Insight, rushing to comparisons with Greece is not in order. Blanka Kolenikova told SNL Financial that even the appointment of a radical left-wing government following snap elections would fail to spook the markets, as was the case in Athens. Nevertheless she stressed that political instability will likely remain a problem for two years, with another election most likely in 2017 after an effective opposition has had time to coalesce.

"It’s highly unlikely that [this government] will last for a full term," she said.

Sarah Hewin, chief economist for Europe at Standard Chartered Bank, also told SNL that the minority government’s inability to implement policy changes might give pause to investors, but overall "the economic backdrop is looking better".

In the short term, political uncertainty will have no impact on the financial sector, André Rodrigues, an equity analyst at Caixa Banco de Investimento in Portugal, told SNL. At Portugal’s banks, he said, the profit and loss account will continue to benefit from the cost of funding, namely term deposits, and lower impairments. Provisions for loans losses are set to go down for the foreseeable future. In his view, this outlook has been caused by a stabilization in European macroeconomics and steady, albeit diminutive, growth in the Portuguese market.