Portugal government battles for survival

Portugal's leaders scrambled to save their coalition government Thursday after being torpedoed by top resignations over the austerity policies squeezing the bailed-out nation.

Financial markets rallied, however, after Prime Minister Pedro Passos Coelho said during a visit to Berlin on Wednesday that he was "convinced" he could maintain government stability despite his finance and foreign ministers saying they were quitting.

Markets had plunged after Foreign Minister Paulo Portas said Tuesday he was resigning, a day after the shock departure of finance minister Vitor Gaspar.

European Central Bank chief Mario Draghi sought to soothe market nerves, saying Portugal's economy was "in safe hands" with Gaspar's successor, Maria Luis Albuquerque.

The Portuguese reform process has been a "painful route and the results achieved have been quite significant, remarkable, if not outstanding," Draghi told a news conference in Frankfurt.

The Portuguese stock market's PSI-20 index showed a gain of 3.92 percent to 5,441.85 points in afternoon trade on Thursday, after plunging 5.31 percent the previous day.

Pressure on the bond market eased, too, with the Portuguese benchmark 10-year government bond yield sliding to 7.40 percent in the afternoon, having spiked to 8.106 percent Wednesday.

The foreign minister's resignation had threatened to sink the government because Portas is also leader of the junior partner in the governing coalition, the small conservative CDS-PP party,

But the prime minister, desperate to hold together a coalition led by his Social Democratic Party, refused to accept Portas's resignation.

The prospect of a deal then emerged when the CDS-PP leadership asked Portas to meet with the premier to find "a viable solution for the government of Portugal".

The prime minister and his foreign minister held their second round of talks in two days Thursday morning in a "very positive atmosphere", the premier's office said.

Passos Coelho was reportedly hoping to be able to present a solution for the government to President Anibal Cavaco Silva at a meeting scheduled for later in the day.

Portuguese newspapers said the prime minister may reshuffle the cabinet to give Portas the post of deputy premier in charge of the economy.

Socialist opposition leader Antonio Jose Seguro had urged the Portuguese president to call snap elections in a meeting Wednesday.

European Union leaders, fearing a resurgence in tension in the eurozone's debt-laden periphery, pressed Lisbon to resolve the crisis.

"The political situation should be clarified as soon as possible," the European Commission's Portuguese president, Jose Manuel Barroso, said Wednesday.

The government has imposed unpopular spending cuts and tax rises under the 2011 bailout deal agreed with its "troika" of creditors, the European Commission, the European Central Bank and the International Monetary Fund.

The austerity measures have plunged Portugal into a deeper recession with higher unemployment than had been expected, sparking mass protests and strikes.

In his resignation letter, Portas said he disapproved of the prime minister's naming of Treasury Secretary Maria Luis Albuquerque as the new finance minister. Her appointment was seen as an indication that Passos Coelho intended to push on with austerity despite protests.

Ishaq Siddiqi, strategist at London-based brokerage ETX Capital, said the crisis would likely end in a cabinet reshuffle or early elections.

"The big fear is this country has failed to demonstrate economic growth since its bailout and its government has also been unable to meet targets set out by the troika," Siddiqi added.

"Now, without a stable government in power, investors are concerned Portugal will be unable to meet its debt obligations."