Portuguese markets rally after political impasse lifted

Portuguese Prime Minister Pedro Passos Coelho on Monday pledged to ¡°shortly¡± present a reshuffle of his Cabinet after a rift within the ruling conservative coalition was resolved and President An¨ªbal Cavaco Silva gave him his backing to see out his term.

Portuguese bonds and stocks rallied on the news, with the country¡¯s risk premium narrowing to levels seen before the crisis broke.

In comments broadcast by SIC Noticias television station, Passos Coelho of the center-right Social Democrats (PSD) confirmed that the leader of its Christian Democrats (CDS-PP) junior coalition partner, Paulo Portas, would assume the post of deputy prime minister and be responsible for coordinating economic policy.

Passos Coelho pledged to complete the terms of Portugal¡¯s 78-billion-euro bailout from the International Monetary Fund and the European Union. ¡°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,¡± Passos Coelho said.

The crisis was sparked by the ¡°irrevocable¡± resignation of Portas as foreign minister over differences on economic policy. Cavaco Silva rejected Passos Coelho¡¯s initial reshuffle of his government, calling instead for a broad national ¡°emergency¡± coalition with the main opposition Socialist Party. After prolonged talks, the Socialists insisted on early elections being held. The Socialists are opposed to the government¡¯s plans to cut a further 4.7 billion euros in spending through laying off public sector workers and changes to the state pension system.

Cavaco Silva on Sunday accepted Passos Coelho¡¯s plans to rejig his government after failing to bring the Socialists on board and gave him his blessing to see out his mandate, which ends in 2015.

Passos Coelho also said on Monday that he would submit his government to a confidence motion in parliament. Now that the differences between the PSD and the CDS-PP have been resolved, Passos Coelho is ensured an absolute majority in the legislative assembly.

The prime minister called for national unity to pull the country out of its crisis. ¡°Although it has not been possible to reach an agreement (with the Socialists), Portugal needs everyone to be united,¡± he said. ¡°There were things on which we were close to reaching an understanding and the government will not stop looking for a consensus.¡±

Simon O¡¯Connor, a spokesman for the EU economic affairs commissioner, Olli Rehn, said Brussels had taken note of Cavaco Silva¡¯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 told reporters in Brussels.

The yield on Portugal¡¯s 10-year bonds fell sharply to 6.2 percent, levels last seen before the rift in the coalition. The yield hit a high of over 8 percent on July 3. The spread with the German equivalent narrowed 41 basis points to 487 basis points. On the Lisbon stock exchange, the PSI-20 index closed up 2.30 percent.

¡°The most important source of political and implementation risk -- new elections -- has been avoided in the near term,¡± Bloomberg quoted Silvia Ardagna, an analyst at Goldman Sachs Group, as saying.