Talks between Portugal’s prime minister and his coalition partner were said yesterday to be progressing to defuse a political crisis that has jolted Lisbon’s hope of a smooth exit from its international bailout.
Prime Minister Pedro Passos Coelho kicked off meetings with the leader of the rightist CDS-PP party overnight and met with him again yesterday to heal a rift that some investors say could make a second rescue package necessary for Lisbon.
“The conversations are ongoing in a very positive atmosphere,” said a government spokesman.
Portuguese assets were highly volatile on the day but by the afternoon bond yields fell and stocks recovering most of their sharp losses from a day earlier.
European markets were helped after ECB president Mario Draghi signalled the bank could cut interest rates further. Draghi, however, also made clear that Portugal does not currently qualify for ECB bond-buying, essentially leaving the country adrift to solve is own crisis.
The resignations this week of finance minister Vitor Gaspar and foreign minister Paulo Portas, who also heads the CDS-PP, have threatened to deprive the government of a majority in parliament.
Gaspar, architect of the spending cuts and tax hikes required by Portugal’s lenders in exchange for a bailout, quit as finance minister on Monday, citing an erosion in support. Portas resigned the next day because he objected to the appointment of treasury secretary Maria Luis Albuquerque to replace Gaspar.
The threat of a prolonged crisis that could lead to elections in a few months has opened the possibility of delays to reforms and cost-cutting under the country’s €78bn bailout.
Passos Coelho is hoping to preserve his coalition government by offering concessions to the CDS-PP. Portas’s CDS-PP party has agreed to negotiate a solution and said its other two ministers would not resign, at least for now.
The head of the Portuguese Industry Confederation piled pressure on the government to find a solution quickly. “The crisis has to be overcome in parliament, and we think the conditions for that to happen exist,” Antonio Saraiva said.
Saraiva also said the country has to be given more time by the EU and IMF — to meet budget goals.
The returns investors demand to hold Portugal’s 10-year bonds were about 15 basis points lower on the day at 7.35%. On Wednesday they surged to more than 8%.
Lisbon’s PSI 20 stock index was up 4% after sliding 5.3% the previous day, as hopes grew the government will stay on.
The EU and IMF are due to start their next review of the economy on Jul 15. That visit may now be delayed.
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