President cools but not cures Portuguese crisis

Mon Jul 22, 2013 7:02am EDT

* President leaves government in office until 2015

* Markets welcome decision to resolve crisis

* Analysts say divergences in coalition still a concern

By Shrikesh Laxmidas

LISBON, July 22 (Reuters) - Portugal's president has soothed investor concerns by keeping the government in place until 2015, but unresolved tensions over austerity mean the country's political crisis has not been laid to rest.

Essentially the immediate symptoms of crisis have been treated, but the cure for underlying condition remains elusive.

Anibal Cavaco Silva on Sunday ruled out a snap election and kept the centre-right coalition government in place until the end of its term. This calmed nerves about Portugal's ability to work its way out of European Union/International Monetary Fund bailout in mid-2014.

After an internal crisis threatened to break-up the coalition and talks for a "national salvation" pact with the opposition Socialists collapsed on Friday, the president's decision not to call an election was welcomed by markets.

Yields Portugal's benchmark 10-year bonds <PT10YT=TWEB) fell 50 basis points to 6.42 percent. Lisbon's main PSI20 stock index rose 1.72 percent.

"On the face of it, one might construe this (decision) to be a positive in so much as it is seen reducing the risk of a reform hiatus," analysts at Rabobank wrote in a research note.

"But, this maintenance of the status quo does nothing to address the divergences of opinion within the ruling coalition which are likely to return to the fore before too long."

Cavaco Silva warned that the coalition partners would have to keep together to complete the bailout programme, allow Portugal to return to the markets and recover from its biggest economic slump since the 1970s.

Prime Minister Pedro Passos Coelho responded on Monday with a pledge to do just that.

But there is a lot that remains unclear.

The dispute within the coalition started when Foreign Minister Paulo Portas, the leader of junior coalition partner CDS-PP party, resigned.

He objected to the appointment of former treasury secretary Maria Luis Albuquerque, an austerity advocate, as finance minister to replace Vitor Gaspar - the architect of the austerity drive in the last two years.

Passos Coelho's idea - before the president's call for the now dropped "national salvation" deal - was to make Portas his deputy and put him in charge of negotiations.

It remains to be seen whether Portas will still be promoted, how he will deal with a finance minister whose appointment he criticised and whether he will force a standoff with the lenders on further austerity.

"Here we are, 22 days after Finance Minister Vitor Gaspar resigned and triggered the crisis, with the political crisis far from solved - it was simply stored away in a corner for now," Publico daily newspaper said in an editorial.

The weekend events have done little to steer Portugal away from the potential of having to request a second bailout.

Lisbon has already been forced to request a delay in the eighth review of the bailout by its creditors, originally scheduled to start last week, until the end of August or early September.

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