* Government's majority hinges on CDS-PP party support
* CDS-PP leader Portas to meet Prime Minister Passos Coelho
* PM to try compromise, early election increasingly likely
* Portugal has funds to meet 2013 needs if bailout suspended
By Axel Bugge and Daniel Alvarenga
LISBON, July 3 Portugal's prime minister and his
junior coalition partner in the government attempted on
Wednesday to cool tempers in a political crisis that could
derail Lisbon's efforts to emerge from its international
Prime Minister Pedro Passos Coelho said his government would
survive the crisis created by the resignations of Foreign
Minister Paulo Portas and his finance minister this week, which
have threatened to deprive it of a majority in parliament
"I am confident that we will be able to overcome this
difficulty," Passos Coelho told journalists after a meeting of
European leaders to discuss youth unemployment in Berlin.
Portas's rightist CDS-PP party met all day on Wednesday and
decided their leader would talk to the prime minister in an
attempt to find a way out of their dispute, the worst political
rift since Portugal received a bailout in 2011.
Luis Queiro, a senior member of the CDS-PP, said the talks
would aim to "define the circumstances that guarantee a viable
solution to the governing of Portugal".
Despite the moves to heal the rift, which was sparked by
deep and growing misgivings in Portugal over the government's
relentless austerity drive to meet the terms of its bailout,
many analysts said it was only a question of time before the
President Anibal Cavaco Silva's office said he had begun
meetings with political parties to seek a solution, which would
go on through the week.
OPPOSITION WANTS ELECTION
Antonio Jose Seguro, leader of the main opposition
Socialists, made clear after meeting the president that his
party wanted an early election.
"We consider that the country has to return rapidly to
having a government with cohesion and strength," Seguro told
journalists, proposing a vote on Sept. 29, to coincide with
With no solution imminent, Portugal's bond and stock prices
tumbled. Lisbon's creditors - the European Union and
International Monetary Fund - are due in Lisbon to start their
next review of the economy on July 15, but that visit might now
Passos Coelho said he thought agreement could be found with
his coalition partner.
"So far, despite all the problems, the two parties in the
coalition have managed to put national interests above their
local differences and have shown the country the majority is
working. It's certainly not now that we'll put that at risk."
Passos Coelho has fought to keep Portugal on course to
complete its 78 billion euro ($102 billion) bailout next year as
scheduled, but the measures have pushed it deeper into its worst
economic crisis since the 1970s.
The returns investors demand to hold 10-year bonds surged to
above 7.9 percent on Wednesday for the first time since November
and the PSI 20 stock index closed 5.3 percent lower,
led by losses of over 10 percent in bank shares.
Finance Minister Vitor Gaspar, architect of the spending
cuts and tax hikes required by Portugal's lenders, stepped down
on Monday, citing an erosion in support for the bailout.
Portas resigned the next day because he objected to the
appointment of Treasury Secretary Maria Luis Albuquerque to
Passos Coelho refused to accept Portas's resignation,
forcing Portas to choose between staying on and pulling his
party out of the coalition, robbing it of its majority.
European Commission President Jose Manuel Barroso, a former
Portuguese premier, said Portugal risked damaging its
hard-earned financial credibility after two years of closely
following its bailout programme.
"This delicate situation requires a great sense of
responsibility from all political forces and leaders," he said.
The president has the power to dissolve parliament and call
an election, but he has indicated that if political parties want
to unseat the government they must win a vote of no confidence.
"One thing is certain, the prime minister is going to do
everything to stay on, giving all possible concessions to
Portas," said political scientist Antonio Costa Pinto. "Failing
that, however, we can hardly avoid an early election."
Portugal had been hoping to exit its bailout and return to
normal debt market funding next year, but the strength of
opposition to continued austerity has now thrown this into
Bank of America Merrill Lynch analysts said the combination
of surging yields and political uncertainty "reduces the
prospects of Portugal regaining full market access in the next
year", raising the prospect of a new bailout being required.