* President's support key for government survival
* PM seen enduring despite early election calls
* Europe shows new forms of solidarity
By Andrei Khalip
LISBON, May 23 President Anibal Cavaco Silva
thanked Portugal's patron saint for a long-delayed approval of
Lisbon's bailout review last week, but the head of state could
claim a share of the credit for himself.
The conservative president's role has grown far beyond his
figurehead status in the past few weeks.
With the president on his side, Prime Minister Passos Coelho
appears immune to opposition calls for an early election,
despite a teetering coalition, record-low popularity in opinion
polls and protests and strikes promised for late May and June.
Such resilience is helping to rehabilitate Portugal in the
eyes of investors. This week, for the first time since 2010, it
dropped out of the top 10 countries for default risk.
Its assumed chance of default in the next five years is
still high, at 22.6 percent - but down from 65 percent in 2012.
Like other sovereign debtors, Portugal has benefited from
the cheap money flooding into markets from major central banks
and, more specifically, from the European Central Bank's pledges
to defend the euro and support the bloc's economy.
Cavaco Silva can take credit for helping Passos Coelho
overcome a rift within the ruling coalition and growing
opposition to austerity after the rejection of some government
measures by the constitutional court. The early April ruling had
held up the bailout review by almost two months.
The president has the power to fire the government and call
new elections, but has ruled out any such move as destabilising.
That means the government can go ahead with spending cuts
dictated by the terms of its EU/IMF bailout, supporting a return
to bond markets after the mid-2011 rescue.
The economy could still undermine faith by shrinking more
than the 2.3 percent the government expects or by extending its
worst recession since the 1970s into 2014, but first-quarter
data last week showed the contraction is easing.
"The president favours this government and his message is
that it will stay on," said Marina Costa Lobo, a political
scientist at the University of Lisbon. "Monday's State Council
meeting was a show of support, typical of Cavaco who likes to
act behind the scenes."
Cavaco Silva, 73, discussed what will happen at the end of
the bailout in mid-2014 with the consultative council. Sources
said most of its members agreed that an early election would
only jeopardise Portugal's financing and growth.
It ended with a vague statement calling for "adequate
balance between financial discipline, solidarity and economic
stimulus", ignoring what the opposition says is a regime crisis.
The first signs of such a balance cropped up on Wednesday,
when Germany vowed to use its development bank KfW to give loans
to small companies and help create jobs in Portugal, where youth
unemployment has reached a record 42 percent.
"We've been in need of measures that are not just about
budget consolidation and can generate fiscal revenues," said
Filipe Garcia, head of Informacao de Mercados Financeiros
consultants. "It's positive, if perhaps coming a bit late."
More European support could follow, analysts say, in the
form of further relaxing of budget deficit targets if the
economy underperforms. Portugal's goals have been eased twice
"Europe wants a success story, not another Greece, so one
could expect some easing of goals possibly after the German
elections" in September, Costa Lobo said.
Visiting Berlin, Finance Minister Vitor Gaspar brushed off
criticism that the European Commission is too inflexible and
said it was focusing on tackling the structural deficit rather
than the nominal gap. That could give Portugal breathing space.
Last week, the European Union and International Monetary
Fund accepted a rough spending cut plan when they sealed the
review required to disburse the next 2 billion euro aid tranche.
The government promised to try to find alternatives to a
levy on pensions after the junior coalition partner, the
rightist CDS, said it would not support the measure.
The amount at stake is about 10 percent of the total 4.8
billion euros that Portugal has promised in savings up to 2015,
and analysts believe the coalition will find compromises and
lenders will make concessions rather than risk a split.
"A coalition breakup would make a scapegoat out of (CDS
leader) Paulo Portas for things going wrong in Portugal. He will
not allow this to happen," said Antonio Vitorino, president of
Notre Europe think tank, adding that Cavaco Silva had "assumed
the role of the guardian of the coalition's stability".
Investors seem to share the view that either the government
will hit its budget deficit targets - 5.5 percent of GDP this
year and 4 percent in 2014, from last year's 6.2 percent - or
lenders will ease the targets again.
Portugal issued its first 10-year benchmark bond since the
bailout on May 7 at a lower yield than its last pre-bailout