* Bond yields retreat, stocks rebound
* Tough negotiations likely in coming days
By Shrikesh Laxmidas and Axel Bugge
LISBON, July 4 Portugal's prime minister has
found a way to maintain government stability with the junior
partner in the ruling coalition, but the full details still need
to be agreed to end a political crisis that has threatened
Lisbon's adjustment under a bailout.
Prime Minister Pedro Passos Coelho said a formula had been
found after meeting with the leader of the rightist CDS-PP party
three times in the past 24 hours to heal the most damaging
political rift since the country received a bailout in 2011.
"A formula was found to maintain government stability,"
Passos Coelho told journalists after a crisis meeting with the
president to discuss the political situation.
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 as the country goes through its deepest slump since
Passos Coelho said the solution would involve a "way to
guarantee the political support of the CDS-PP of the
government," adding that the resignation of Portas had been a
Still, the prime minister gave no details of the agreement
and the final outcome still depends on further negotiations with
Portas in coming days. It is likely to include more ministerial
positions for the CDS-PP, analysts said.
Any final agreement will also have to be approved by
President Anibal Cavaco Silva, who will meet with all political
parties starting on Monday.
Portuguese assets were highly volatile on the day but by the
afternoon bond yields fell and stocks recovered most of their
sharp losses from a day earlier as agreement appeared closer.
But, analysts say the crisis, whatever the outcome, is
likely to deepen Portugal's economic challenges. Unemployment is
at record highs near 18 percent and the country entered its
third year of recession in 2013.
"Whatever the (political) scenario involved, the re-pricing
of the country's risk premium will probably be permanent, at
levels lower than the present ones but higher than the minimum
achieved just before the occurrence of this episode," said Paula
Carvalho, chief economist at Banco BPI, in a research note.
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
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 78-billion-euro
"A negotiated solution in which Portas stays out of the
government but the coalition survives would allow the CDS-PP
leader to partially save face," said Antonio Barroso, a
London-based political analyst at advisory firm Teneo
Intelligence, in a research note. "However, the negotiations are
likely to prove difficult."
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 told
In a sign of how widespread disenchantment with austerity
has become in Portugal, Saraiva also said the country has to be
given more time by creditors - the European Union and
International Monetary Fund - to meet budget goals under their
The returns investors demand to hold Portugal's 10-year
bonds were about 16 basis points lower on the day at 7.34
percent. On Wednesday they surged to more than 8 percent - their
highest since November.
Lisbon's PSI 20 stock index closed 3.7 percent
higher after sliding 5.3 percent the previous day, as hopes grew
that the government will stay on and avert an early election.
The EU and IMF are due to start their next review of the
economy on July 15, but that visit might now be delayed.