Portugal: Deal Saves Coalition Government

A deal has been reached to save Portugal's centre-right coalition government, the country's prime minister Pedro Passos Coelho has said.

The coalition was threatened with break-up because of a dispute over austerity policies but Mr Passos Coelho said "a formula" had been found that secures its survival.

The policies squeezing the bailed-out nation had led markets to plunge on Wednesday.

But they rallied after Mr Passos Coelho said he was "convinced" he could maintain government stability despite his finance and foreign ministers saying they were quitting.

European Central Bank chief Mario Draghi sought to soothe market nerves, saying Portugal's economy was "in safe hands" with finance minister Vitor 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", Mr Draghi told a news conference in Frankfurt.

The Portuguese stock market's PSI-20 index rose to close 3.73% higher on Thursday, after plunging 5.31% on Wednesday.

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

Foreign minister Paulo Portas's resignation had threatened to sink the government because he is also leader of the junior partner in the governing coalition, the small conservative CDS-PP party.

But the PM, desperate to hold together the coalition led by his Social Democratic Party (PSD), refused to accept Mr Portas' resignation.

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

Mr 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 Mr 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 on 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 on 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 (£4m) 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, Mr 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 Mr 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."

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