Investors ease up pressure on Portugal as coalition parties negotiate to avoid govn't collapse

LISBON, Portugal – Talks to patch up the rift in Portugal's government and rescue the country's austerity program continued Friday as Prime Minister Pedro Passos Coelho sought common ground with his coalition partner.

Coelho and the leader of the Popular Party, Paulo Portas, have been in talks to avoid the government's collapse in a dispute over austerity measures and other reported grievances concerning the two parties.

Portas's resignation as Portuguese foreign minister earlier this week, after his demands for less austerity and more growth measures went unheeded, plunged the country into crisis mode.

Investors have watched developments in Portugal with concern — the interest rate Portugal pays on its debt has spiked sharply amid fears that the resignations could lead to the government falling apart and making it harder for the country to pay what it owes.

Ratings agency Standard & Poor's revised its outlook on Portugal's long-term sovereign credit ratings to negative from stable, saying "political uncertainty could derail Portugal's forthcoming debt issuance and its hoped-for exit in 2014" from the bailout program.

But news of the talks calmed have investors Friday. The interest rate on Portugal's benchmark 10-year bond, an indicator of investor confidence in a country, descended to 6.86 percent on Friday, after it had shot up above 8 percent on Wednesday. Stocks slipped 0.45 percent on the Lisbon stock exchange after registering strong gains on Thursday.

For over three years now, the austerity demanded by creditors has met with growing resistance from politicians, trade unions and business leaders. Austerity has been widely blamed for driving the jobless rate in Portugal to 17.6 percent and for what is forecast to be a third straight year of recession in 2013.

Carlos Costa, governor of the Bank of Portugal, said Friday there was a public perception that the rescue package set in place to bail Portugal out and help restore its economy had been deviated off course by the international financial crisis.

"Our program was executed rigorously," Costa said. "But among the Portuguese people, its social and politics agents, there is a feeling of failure, that we failed to reach the goals."

Costa said this perception was being caused because the budgets set "in the macroeconomic scenario" had been buffeted by the international recession.

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Heckle contributed from Madrid.