Portugal’s Coelho Pledges to Complete Bailout After Ending Rift

Portuguese Prime Minister Pedro Passos Coelho pledged to push ahead with a government reshuffle and to finish the country’s bailout program on time after winning the president’s backing to see out his term.

“The government has its full powers and is doing what is necessary, which is, I recall, the completion of the economic and financial assistance program by the end of June 2014,” Coelho said in comments broadcast by SIC Noticias television station. Portuguese bonds rose for a third session.

President Anibal Cavaco Silva, who has the power to dissolve parliament, endorsed Coelho’s plan to hold his coalition government together in a speech in Lisbon last night, accepting the premier’s failure to bring the Socialist opposition on board with his program. A broader agreement would have been “the ideal solution,” the president said.

Cavaco also changed his stance on an early ballot after last week saying that if a consensus pact was reached, a vote should 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 yield on Portugal’s 10-year bonds tumbled 41 basis points to 6.39 percent at 3:12 p.m. London time. Borrowing costs have returned to their level of July 1, the day before a rift in the coalition emerged after reaching a seven-month high of more than 8 percent on July 3.

Market Access

Coelho said on July 18 that holding elections before the current government’s term runs out in 2015 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.

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.

Approval Withheld

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 withheld his approval of their deal, calling for a broader accord also involving the Socialists.

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, Seguro said. They led the Social Democrats by 12 percentage points in a poll published on July 12, and have called for early elections.

Coelho said today he plans to submit a formal proposal about new cabinet appointments to the president “very soon.”

“The president has known from the start that my intention was to carry out a reshuffle,” Coelho said, without giving details.

Program Review

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.

Simon O’Connor, a spokesman for the EU Economic and Monetary Affairs Commissioner Olli Rehn, said the bloc had taken note of the president’s call for the government to remain in office.

“We will continue to work with the government” to foster “the conditions for a sustained recovery,” O’Connor said in comments to reporters in Brussels today.

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