Market relief as Portugal defuses political crisis

LISBON, Portugal (AP) Portuguese financial markets surged Monday following a weekend decision to allow the fragile coalition government to remain in charge, eliminating for now the prospect of snap elections and more political uncertainty.

Lisbon's PSI 20 stock index was up 2.4 percent in late afternoon trading while government bond prices rose sharply, causing borrowing rates to fall. The interest rate on the benchmark 10-year bond what the government would pay to borrow money from the open market fell 0.45 percentage points to 6.29 percent.

Investors got a boost of confidence after President Anibal Cavaco Silva late Sunday said the best option for Portugal is for the coalition to stay in power. It nearly fractured on July 2 when Foreign Minister Paulo Portas offered his resignation. Prime Minister Pedro Passos Coelho sought to save the coalition by offering Portas a position as his deputy.

Cavaco Silva did not say whether he would accept Portas' nomination to the new post. But his decision put on the backburner the possibility of holding early elections amid broad public discontent over harsh austerity measures the government has pushed through to abide by the terms of its 78 billion euros ($102 billion) international bailout.

Cavaco Silva will probably formally endorse the coalition in coming days, allowing the government to submit a confidence motion to Parliament that is expected to pass, said Antonio Barroso, a London-based analyst with the Teneo Intellience. Portas would take over economic coordination in his new role.

Passos Coelho said he and his coalition partners must now rebuild the confidence lost following infighting over how to deal with austerity and deep economic misery.

"We have a new reality and we must live in accordance with what we have and not with what we would like to have," he said.

Analysts expressed doubts that his government will survive for long.

"While imminent elections are now doubtful, this government is unlikely to last until 2015," when the next general elections are due, said Rahman Mujtaba, of the Eurasia Group political risk consultancy.

The two main parties that make up the coalition have been at odds over austerity and will have a difficult time implementing painful economic policies that are expected to make life even more difficult for Portugal's citizens. A proposal outlining reforms that must be implemented over the next two years will probably be submitted to Parliament sometime after the summer, Mujtaba said.

"Both parties are expected to stagger on trying to implement the bailout agreement as the Portuguese president decides on what steps to take next," said Michael Hewson, an analyst for London-based CMC Markets UK. "This failure to adopt consensus is becoming all too familiar in the politics of southern Europe."

The coalition also has to agree on a budget for 2014 in the fall and local elections will take place on Sept. 29, representing the first electoral test for the coalition.

Hewson said investors remain concerned that Portugal may not be able issue new debt next year. The country could be forced to seek another bailout if it is unable to comply with a plan for it to exit its current rescue program in 2014.

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Clendenning reported from Madrid.