Portugal’s Coelho Wins Backing From President to Complete Term

Portuguese Prime Minister Pedro Passos Coelho’s government won the support of the head of state to stay in office until its term ends in 2015 as President Anibal Cavaco Silva ruled out early elections that would disrupt completion of a bailout plan.

“The government has the support of an unequivocal majority in parliament,” Cavaco Silva, who has the power to dissolve parliament, said in a speech in Lisbon last night. Portugal’s bonds rose, extending a three-day rally that has wiped more than 80 basis points from 10-year borrowing costs.

Coelho won the endorsement only after the ruling coalition parties and the opposition Socialists failed to reach a consensus pact that Cavaco Silva said would have been “the ideal solution.” The prime minister said on July 18 that uncertainty over a vote could harm the country’s efforts to regain access to the bond market.

Portugal has 11 months left to exit its European Union-led bailout plan. Coelho, 48, is backed by his Social Democratic Party and the smaller conservative CDS party, which together have a majority of seats in parliament.

“The most important source of political and implementation risk -- new elections -- has been avoided in the near term,” Silvia Ardagna, an analyst at Goldman Sachs Group Inc., wrote in a note to clients.

Bond Rally

The yield on Portugal’s 10-year bonds tumbled 40 basis points to 6.4 percent at 10:39 a.m. London time. Borrowing costs have returned to their level of July 1, the day before a rift in the coalition emerged. The yield breached a seven-month high of more than 8 percent on July 3 compared with the 3.2 percent the country pays on its bailout loans.

The nation’s debt agency said on July 12 that it plans to resume “regular issuance” of bonds “only if market conditions are conducive.” Financing needs for 2013 are “fully covered,” and in the second quarter the debt agency started to “pre-fund” for borrowing needs in 2014, IGCP said.

The president shifted his stance on an early ballot after last week saying that if a consensus pact was reached, a vote could take place next year once the country emerged from its aid program. The previous six coalitions that have governed Portugal since its return to democracy in 1974 have failed to survive a full term.

The two governing parties settled a split over budget policy on July 6, with Coelho offering CDS leader and Foreign Minister Paulo Portas the post of vice premier and control over economic policy. While ruling out an immediate election, the president on July 10 didn’t endorse their deal, calling for a broader accord also involving the Socialists.

No Salvation Pact

The president asked the three parties to reach a “national salvation” agreement that would help Portugal complete its aid program through June 2014, according to his July 10 speech. He also urged them to ensure debt levels will be sustainable for a new government after the bailout.

The parties failed to agree on measures to complete the bailout plan after six days of talks, Socialist Party leader Antonio Jose Seguro said on July 19. The Socialists oppose the coalition government’s planned 4.7 billion euros ($6.2 billion) of spending cuts. They led the Social Democrats by 12 percentage points in a poll published on July 12, and have called for early elections.

The government will now ask parliament to approve a confidence motion, said Cavaco Silva, 74, who is a former prime minister and Social Democratic Party leader. Parliament on July 18 rejected a censure motion against the government presented by the Greens.

The eighth review of Portugal’s progress on meeting the terms of the 78 billion-euro aid program was pushed back to the end of August or the start of September because of the political situation, the Finance Ministry said on July 11. The review had been due to start on July 15.

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