Portuguese stocks rose Monday and the country's borrowing costs fell after a governing crisis was defused by a decision to allow the fragile coalition to remain in charge, eliminating for now the prospect of snap elections.
Shares on Lisbon's PSI 20 exchange were up 1.7 percent in afternoon trading while the interest rate on the benchmark 10-year bond fell 0.36 percentage points to 6.37 percent.
Investors got a boost of confidence after President Anibal Cavaco Silva late Sunday said the best option for Portugal is for the coalition to stay in power. It nearly fractured on July 2 when Foreign Minister Paulo Portas offered his resignation. Prime Minister Pedro Passos Coelho sought to save the coalition by offering Portas a position as his deputy.
Cavaco Silva did not say whether he would accept Portas' nomination to the new post. But his decision to give the coalition another chance put on the backburner the possibility of holding early elections amid broad public discontent over harsh austerity measures the government has pushed through to abide by the terms of its 78 billion euros ($102 billion) international bailout.
Analysts were divided on whether the government will survive until elections scheduled for 2015.
"A cabinet reshuffle as was previously expected before Cavaco Silva's intervention remains likely in the near future; while imminent elections are now doubtful, this government is unlikely to last until 2015," said Rahman Mujtaba, of the Eurasia Group political risk consultancy, in a note to clients.
The two main parties that make up the coalition have been at odds over austerity and will have a difficult time implementing painful economic policies that are expected to make life even more difficult for Portugal's citizens. A proposal outlining reforms that must be implemented over the next two years will probably submitted to Parliament sometime after the summer, Mujtaba said.
"Both parties are expected to stagger on trying to implement the bailout agreement as the Portuguese president decides on what steps to take next," said Michael Hewson, an analyst for London-based CMC Markets UK. "This failure to adopt consensus is becoming all too familiar in the politics of southern Europe."
Hewson said investors remain concerned that Portugal may not be able issue new debt next year. The country could be forced to seek another bailout if it is unable to comply with a plan for it to exit its current rescue program in 2014.
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