July 22, 2013 6:20 pm

Portugal PM calls for unity and pledges to keep bailout on track

Pedro Passos Coelho©AFP

Pedro Passos Coelho

Pedro Passos Coelho, Portugal’s prime minister, said on Monday that he was determined to restore investor confidence in the troubled economy and to keep the country’s controversial €78bn bailout programme on track as he sought to draw a line under weeks of political uncertainty.

The reassurances came a day after Aníbal Cavaco Silva, the Portuguese president, decided against a potentially destabilising snap election and backed the coalition government to remain in office until the end of its mandate in 2015.

That news drove Portuguese bonds and shares higher amid renewed investor hope that the centre-right government in Lisbon would now be able to push ahead with promised reforms and meet the terms of its bailout plan.

Lisbon’s PSI index of leading Portuguese shares rose almost 2.5 per cent, while the yield on Portugal’s benchmark 10-year bond dropped 1.2 per cent to 6.72 per cent. The cost of insuring against a default on Portuguese sovereign debt also fell, in another sign of investor relief.

Despite the relief rally, some officials from the “troika” of international lenders believe the recent political instability, where a junior coalition partner nearly quit the government over austerity policies, has made a second bailout when current financing runs out in mid-2014 far more likely.

The country’s borrowing costs have risen sharply in recent weeks amid fears that Mr Passos Coelho’s decision to stick with ministers committed to seeing through the tough rescue programme, which triggered senior ministerial departures, would bring down the government.

Mr Cavaco Silva said he would have preferred the opposition and government unite in a “national salvation” pact but argued that “an early election would not resolve our problems”.

Despite the president’s failed effort, Mr Passos Coelho called on politicians to set aside differences and demonstrate unity. “We will rebuild confidence without raising any doubts about the process we are carrying out, saying, ‘yes, we want to complete the assistance programme on the agreed date’,” he said, according to a Reuters report.

The president’s refusal to call an early election offered crucial support to Mr Passos Coelho, whose cabinet was shaken by the resignation of two senior ministers earlier this month. The prime minister is seeking to hold the government together by naming Paulo Portas, the head of his junior coalition partner the conservative Popular party (CDS-PP), as deputy prime minister and giving him oversight of talks with the troika.

Mr Portas had resigned as foreign minister over fiscal policy and the appointment, if approved by the president, is likely to complicate talks with the EU and International Monetary Fund. But Simon O’Connor, economic spokesman for the European Commission, insisted Brussels “didn’t see any political instability at the moment” that would hinder programme execution.

“There is a government in place, in office, that has a workable parliamentary majority,” Mr O’Connor said. “We will continue working with that government.”

Analysts welcomed signs the latest political impasse was coming to an end but cautioned the government still faced significant risks. Mujtaba Rahman, head of European analysis for the Eurasia Group risk consultancy, said the government “almost certainly” will not survive until 2015.

Additional reporting by Peter Spiegel in Brussels

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