* President leaves government in office until 2015
* Markets welcome decision, 10-yr bond yield falls 33 bps
* Premier says still wants to make coalition partner his
* Vows to ensure Lisbon exits bailout on time
* Analysts say divergences in coalition still a concern
By Shrikesh Laxmidas
LISBON, July 22 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 the underlying condition remains
President 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 some 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 on Portugal's benchmark 10-year bonds <PT10YT=TWEB)
fell about 33 basis points to 6.59 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 pledged to do just that,
saying the country needs to recover the confidence that had been
dented by the crisis.
"We will rebuild the 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.
Brussels also hailed the latest developments.
"We welcome the importance the president has placed on the
successful completion of the economic adjustment programme and
will continue to work with the government and support Portugal's
efforts to create conditions for a sustained recovery, growth
and job creation," a European Commission spokesman said.
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.
The premier on Monday confirmed this is still the plan,
although he is yet to formalise the request to the president who
will then announce the final terms of the reshuffle.
If the cabinet shakeup goes ahead, it remains to be seen how
Portas will deal with a finance minister whose appointment he
criticised and whether he could still force a standoff with the
lenders on further austerity.
In a sign that Portas' likely promotion could be seen as a
risk, Portugal's 10-year bond yield rebounded from session lows
of 6.41 percent after the premier's comments.
"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, which
some fear could imply losses for private debt holders.
Rabobank's analysts warned against interpreting Monday's
bond rally "as signalling the all clear in terms of Portuguese
political risk and the threat this represents regarding the
potential need for additional official creditor support."
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