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Portugal’s Coelho Meets President to Try to Avoid Early Vote

Portuguese Prime Minister Pedro Passos Coelho presented the country’s president with a plan to hold the government together after the leader of his coalition partner announced his resignation from the Cabinet this week.

“The prime minister presented today to the president of the republic the political understanding reached with the leader of the CDS,” Rui Baptista, a spokesman for Coelho, said by phone today. The leaders of the ruling Social Democrats and CDS parties are set to make a statement after a meeting tomorrow afternoon, he said.

Coelho, who leads the Social Democrats, needs the CDS for a majority in parliament to pass measures and meet terms of a bailout from the European Union and International Monetary Fund that ends in June 2014. President Anibal Cavaco Silva, who has the power to dissolve parliament and call early elections, is set to meet with political parties next week.

“It’s very important that Portugal is able to stabilize the political situation after scoring an own goal, and create the prerequisites for economic success,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters today in Mikkeli, Finland.

CDS leader Paulo Portas, a former journalist, said July 2 he was quitting as foreign minister in a dispute over budget policy with the prime minister. Coelho, who lost Finance Minister Vitor Gaspar the day before, refused to accept Portas’s resignation, citing his role as leader of a coalition party. Portas remains in the Cabinet because Coelho hasn’t submitted his resignation to the president.

Yields Fall

“A way will be found to guarantee the government has political support from the CDS and in that manner ensure political stability,” Coelho said yesterday. “As head of government I will now seek from the two parties a reinforcement of political support for the government.”

Portugal’s bond yields fell today after the 10-year rate jumped to a seven-month high of more than 8 percent earlier this week after the rift emerged. The yield dropped 14 basis points to 7.13 percent in London. That’s up from 6.45 percent on June 28, the last trading day before Gaspar resigned on July 1, and from 5.19 percent on May 21, the lowest in almost three years. The country pays 3.2 percent on its bailout loans.

Portugal’s credit rating outlook was revised today to negative from stable by Standard & Poor’s, which affirmed the country’s BB long-term sovereign rating. Its debt is ranked below investment grade by Fitch Ratings, Moody’s Investors Service and S&P.

‘Challenging’ Environment

“This week’s ministerial resignations complicate Portugal’s already challenging policy-making environment and suggest even less room for maneuver than when we changed the rating outlook to stable in March,” S&P said in a statement. “Growing political uncertainty could derail Portugal’s forthcoming debt issuance and its hoped-for exit in 2014” from the aid program.

“I hope this is enough to convince the president, after the meditating and listening he has to do, to move ahead and avoid calling early elections,” Antonio Pires de Lima, a CDS party official, said in comments broadcast by TVI television channel today. Cavaco Silva will start meetings with leaders of the political parties on July 8.

‘Budget Rigor’

Preparing for the period after the country’s aid program ends “is of the greatest importance for our future, independently of the government that is in office in June 2014,” Cavaco Silva said at a conference in Lisbon today. “The demands of budget rigor will not disappear with the end of the ongoing adjustment program.”

The eighth review of Portugal’s progress on meeting terms of the 78 billion-euro ($100 billion) aid program is due to start July 15, the Finance Ministry said last month. The government has started raising cash to finance its 2014 deficit after covering its needs for this year, then-Finance Minister Gaspar said in May.

“The tasks of implementing the program have been made more difficult,” Marco Buti, head of the European Commission’s economics department, said today at the conference in Lisbon. “A lot of progress has been made; let’s not jeopardize that.”

Coelho is battling rising joblessness and a deepening recession as he cuts spending and raises taxes to meet the terms of the bailout. He announced measures on May 3 intended to generate savings of about 4.8 billion euros through 2015 that include reducing the number of state workers.

Parties’ Disagreements

Last year, the two coalition parties overcame disagreements to hold their alliance together. They differed on a plan to raise the social security tax rate, which was later scrapped by Prime Minister Coelho. The two parties said on Sept. 20 that they would set up a Coalition Coordination Council to improve cooperation.

Portas this week opposed the prime minister’s decision to name Secretary of State for the Treasury Maria Luis Albuquerque as finance minister to replace Gaspar. Pedro Mota Soares and Assuncao Cristas, ministers from the CDS group, won’t follow Portas in stepping down, Luis Queiro, a party official, said on July 3.

Opposition Socialist leader Antonio Jose Seguro, whose party led Coelho’s Social Democrats by 14 percentage points in a poll last month, has called for early elections.

Coelho formed the majority coalition with the CDS after June 2011 elections, taking over from a Socialist minority government that had requested the EU-led bailout in April 2011. Coalition governments in Portugal have tended to be unstable and short-lived. Between 1974, when the country returned to democracy after a four-decade dictatorship, and the 2011 election, Portugal had six coalition governments, none of which survived a full term.

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net; Henrique Almeida in Lisbon at halmeida5@bloomberg.net

To contact the editors responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net; Jerrold Colten at jcolten@bloomberg.net

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