LISBON, Portugal - The leaders of Portugal's governing coalition parties remained locked in negotiations Thursday as they attempted to repair differences that threatened to pitch the bailed-out country into turmoil and reignite concerns over Europe's debt crisis.
Prime Minister Pedro Passos Coelho, head of the senior coalition partner, and the leader of the junior partner, Popular Party chief Paulo Portas, met for the second time in 24 hours in an attempt to avoid the government's collapse in a dispute over austerity measures and other reported grievances concerning the relative standings of the two parties within the coalition.
Portugal's political stability, certainly compared with turmoil in Greece, has helped ease investor concerns over the country's financial fates since a 78 billion euros ($101 billion) international rescue two years ago — the relatively calm backdrop helped lower Portugal's borrowing costs and allowed a raft of economic reforms to be enacted.
"I think Portugal has achieved very remarkable results — certainly, it's been a painful route — and the results that have been achieved have been quite significant, remarkable, if not outstanding," European Central Bank president Mario Draghi said at his monthly press conference in Frankfurt on Thursday.
But Portas's resignation as foreign minister earlier this week, after his demands for less austerity and more growth measures went unheeded, plunged the country back into crisis mode, putting the coalition in disarray and alarming financial markets and its partners in the 17-country eurozone.
The resignation of Finance Minister Vitor Gaspar, a technocrat with no party affiliations, on Monday fuelled fears of a political meltdown. Gaspar complained he lacked political and public support for his austerity program.
Passos Coelho, the prime minister, refused to accept Portas's resignation and appealed for talks which began Wednesday night. He is due to meet President Anibal Cavaco Silva later and unconfirmed media reports said he aimed to present the head of state with an agreement that will save the centre-right government.
Investors breathed a sigh of relief as the quarreling subsided. The interest yield on Portugal's benchmark 10-year bond slipped back to 7.21 per cent after soaring above 8 per cent the previous day. Though the rate is still far above the 5.23 per cent it reached in May, it is way down on the 9.77 per cent it was at the same time last year.
The Lisbon stock exchange also rallied, rising 3 per cent to 5,387 by early afternoon, after plunging 5.3 per cent on Wednesday and contributing to falls in European and Asian markets.
"Basically what the market is doing today is understanding that ... there is a big chance of an understanding between the partners in the coalition, and that situation is being reflected in stronger share prices," said Paulo Guerrero, a broker at Espirito Santo Investment Bank in Lisbon.
People in the streets, however, were less forgiving.
After enduring two years of austerity, that have included sharp hikes in income taxes and in sales taxes and cuts in public sector pay and pensions, the country has been mired in recession and seen its jobless rate ratchet up to 17.6 per cent.
Among the Portuguese, exasperation with their political leaders was evident.
"It's a joke," said Filipa Pinto, a 51-year-old housewife sitting in the shade on a scorching hot day in Lisbon. "We're fighting to pay our bills at the end of the month and they're playing games."
"It just shows you can't trust politicians," said 21-year-old mechanical engineering student David Guedes outside Lisbon's Technical University. "They're interested in themselves, not the people."
Others thought that left-leaning parties, such as the Socialists who want more job-creation measures, ought to replace the current administration. The Socialists, though, were the party in government at the time of the bailout in 2011.
"We need to change the government. It's not working this way," said a 59-year-old unemployed woman called Deolinda, who declined to give her surname. "We need a party (in power) that can get the country moving again."
Making big changes in economic policy won't be easy, though.
Despite the worst recession in almost 40 years, the bailout agreement signed by all three major parties demands further cuts in expenditure over the next year.
Portugal's creditors — its partners in the eurozone and the International Monetary Fund — won't hand over the bailout funds, which are delivered in stages, unless debt-heavy Portugal cuts even deeper.
Geir Moulson in Berlin contributed to this report.