Portugal patches up government but jitters persist

Portugal’s Prime Minister Pedro Passos Coelho patched up his ruling coalition Friday to save it from collapse, but financial jitters revived as the nation’s president warned of grave risks ahead.

Investors fear the crisis could unleash a new wave of instability in the eurozone’s debt-laden periphery, where anti-austerity sentiment is growing with no end in sight to high unemployment and recession.

Bond markets rallied in mid-afternoon trade a day after the prime minister said he had found a “formula” to hold together the shaky coalition, led by his Social Democratic Party.

But major credit rater Standard and Poor’s lowered the outlook on Portugal to negative from stable, indicating the country was liable to have its mid-range BB/B sovereign credit score downgraded.

The Lisbon stock exchange’s key PSI-20 index meanwhile closed 0.45 percent lower on Friday, giving up earlier gains prompted by signs of an emerging political fix.

President Anibal Cavaco Silva said the recession-struck country may find itself unable to raise money on bond markets when its 78-billion-euro ($100-billion) bailout programme expires next year.

“It is possible that Portugal will not succeed in returning to the markets at reasonable rates despite implementing the programme,” the president told a gathering of economists.

Such a failure could be provoked “by external financial events or internal political difficulties”, he warned.

Bank of Portugal governor Carlos Costa at the same conference urged the government to live up to its “political responsibility”.

The crisis erupted when Foreign Minister Paulo Portas, who is also leader of the junior partner in the governing coalition, the small conservative CDS-PP party, tendered his resignation on Tuesday.

The announcement, which came a day after the shock departure of finance minister Vitor Gaspar, threatened to tear the coalition apart.

After two days of talks with Portas, Passos Coelho met with the country’s president and announced he had found a “formula” to assure the stability of his government.

The premier gave no details of the deal, saying it was subject to further negotiations, causing lingering uncertainty.

“Whatever agreement they may reach, he will not gain the confidence of the country or the markets,” the daily Diario de Noticias warned in an editorial.

The political crisis is centred on discord over the austerity policies required under the bailout extended in May 2011 by Portugal’s “troika” of creditors, the International Monetary Fund, European Commission and European Central Bank.

Portas, who wants a change in economic policy, objected to the premier’s choice of new finance minister, Treasury Secretary Maria Luis Albuquerque, who was expected to pursue further austerity in defiance of mass protests.

Despite growing opposition to its austere policies, the government is now under pressure to present a further 4.7 million euros in spending cuts to the troika when its auditors visit Portugal on July 15.

The Portuguese president of the European Commission, Jose Manuel Barroso, warned on Friday that Portugal was at risk if it did not show determination to correct imbalances in its economy.

Explaining its outlook, Standard and Poor’s warned in a statement that “growing political uncertainty could derail Portugal’s forthcoming debt issuance and its hoped-for exit in 2014 from the Troika-sponsored support programme.”

The austerity measures have plunged Portugal into a deeper recession with higher unemployment than had been expected, sparking mass protests and strikes.

The government expects the economy to contract by 2.3 percent by the end of the year, while the unemployment rate has soared to a record 18.2 percent.

The yield on benchmark 10-year Portuguese government bonds dipped below the key seven percent level on Friday, down from the critical 8.0 percent at the height of the political crisis mid-week.