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Portugal bond yields fall as government vows to stick to bailout

Bloomberg/Contributor | Bloomberg | Bloomberg

Portuguese bond yields fell and stocks rallied on Monday after the two parties leading the coalition government vowed to keep an international bailout deal on track.

Portugal's Prime Minister Pedro Passos Coelho confirmed he would announce a cabinet reshuffle and that the leader of the junior coalition partner, Paulo Portas would be deputy prime minister in the new arrangement.

It was Portas's resignation on July 2 from the post of foreign minister that sparked a political crisis and led to a sell-off in Portuguese stocks and a spike in the country's bond yields.

On Monday, 10-year Portuguese bond yields dropped to 6.5 percent, near a three-week low and the Portuguese PSI 20 stock index rose 1.95 percent. Banks rallied with shares of Banco Commercial Portugues rising 4.44 percent, Banif Sa up 12.5 percent and Banco Espirito Santo higher by 3.96 percent.

Earlier, on Sunday, Portugal's President Anibal Cavaco Silva ruled out snap elections after "national salvation" talks between the two ruling parties and the opposition Socialists failed to lead to a deal.

Portugal is in the second year of an unpopular bailout program under which the government has been cutting government spending.

"We think this is a positive (or at least less negative) outcome than a scenario of snap elections this year. The coalition government still has a majority in the parliament as long as it stays united, in which case it should be able to stay in power through mid-2015 when its 4-year term comes to an end," analysts at Barclays said in a morning note.

(Read More: Portugal ruling party vows to meet bailout goals)

However fears remain that the ruling coalition will have limited powers to push through 4.7 billion euros ($6.17 billion) in additional spending cuts and austerity measures to keep the country's bailout on track until mid-2014 when Portugal was expected to exit the program.

"We cannot correct, just in two years, some imbalances that were lasting for decades. We need more time in order to have correct consolidation on the fiscal front," Miguel Frasquilho, a member of the ruling Social Democratic Party, told CNBC on Monday.

Frasquilho also said that while Portugal would continue with its austerity program, it must also boost growth.

"We also need, in my opinion, some tax relief for the rest of the economy, for companies, for families, and that would be very important in order to boost the economy, to increase confidence and to slowly begin decreasing unemployment which is one of the highest problem we have in Portugal."

(Read More: Portugal's bond market tanks as crisis deepens)

Cecilia Meireles, member of the junior coalition party, the rightist CDS-PP, told CNBC on Monday, the government was committed to the bailout program.

"We have given all assurances to the president that we can have a stable government...that we can finish the [bailout] program," she said.

(Read More: Why Portugal has to 'save itself' by Sunday)

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81.

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