Accord reached to save Portuguese government coalition

Portugal’s centre-right government coalition on Thursday averted its break-up in a dispute over austerity policies after finding “a formula” that secures its survival, Prime Minister Pedro Passos Coelho said.

“A formula has been found that will secure the stability of the government,” said Passos Coelho after talks with President Anibal Cavaco Silva.

The policies squeezing the bailed-out nation had led markets to plunge on Wednesday before rallying after

Passos Coelho said he was “convinced” he could maintain government stability despite his finance and foreign ministers saying they were quitting.

Foreign Minister Paulo Portas said Tuesday he was resigning, a day after the shock departure of finance minister Vitor Gaspar.

European Central Bank chief Mario Draghi sought Thursday to soothe market nerves, saying Portugal’s economy was “in safe hands” with Gaspar’s successor, Maria Luis Albuquerque.

The Portuguese reform process has been a “painful route and the results achieved have been quite significant, remarkable, if not outstanding”, Draghi told a news conference in Frankfurt.

The Portuguese stock market’s PSI-20 index rose to close 3.73 percent higher on Thursday, after plunging 5.31 percent the previous day.

Pressure on the bond market eased, too, with the Portuguese benchmark 10-year government bond yield sliding to 7.40 percent in the afternoon, having soared to 8.106 percent Wednesday.

The foreign minister’s resignation had threatened to sink the government because Portas is also leader of the junior partner in the governing coalition, the small conservative CDS-PP party,

But the prime minister, desperate to hold together the coalition led by his Social Democratic Party (PSD), refused to accept Portas’s resignation.

The prospect of a deal emerged when the CDS-PP leadership asked Portas to meet with the premier to find “a viable solution for the government of Portugal”.

Passos Coelho and his foreign minister held talks in a “very positive atmosphere”, the premier’s office said earlier.

Portuguese newspapers said the prime minister could reshuffle the cabinet to give Portas the post of deputy premier in charge of the economy.

“The prospect of a snap election is so terrifying for the PSD that the prime minister will do anything to save the coalition”, said Antonio Costa Pinto, a political scientist at Lisbon University.

Socialist opposition leader Antonio Jose Seguro had urged the Portuguese president to call snap elections in a meeting Wednesday.

European Union leaders, fearing a resurgence in tension in the eurozone’s debt-laden periphery, pressed Lisbon to resolve the crisis.

“The political situation should be clarified as soon as possible,” the European Commission’s Portuguese president, Jose Manuel Barroso, said Wednesday.

The government has imposed unpopular spending cuts and tax rises under the 2011 bailout deal agreed with the “troika” of creditors — the European Commission, the European Central Bank and the International Monetary Fund.

It is now under pressure to present a further 4.7 million euros in spending cuts to the troika when its delegates visit on July 15.

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

In his resignation letter, Portas had said he disapproved of the prime minister’s naming of Treasury Secretary Maria Luis Albuquerque as the new finance minister.

Her appointment was seen as an indication that Passos Coelho intended to push on with austerity despite protests.

“The big fear is this country has failed to demonstrate economic growth since its bailout and its government has also been unable to meet targets set out by the troika,” said Ishaq Siddiqi, strategist at London-based brokerage ETX Capital.

“Now, without a stable government in power, investors are concerned Portugal will be unable to meet its debt obligations.”