LISBON President Anibal Cavaco Silva proposed an urgent cross-party agreement between the ruling coalition and opposition Socialists on Wednesday to ensure Portugal can complete adjustments under a bailout by June 2014 before holding early elections.
Cavaco Silva said the coalition government remains in office and made no clear statement about a proposed cabinet reshuffle by the ruling Social Democrats and their junior coalition partner, the rightist CDS-PP party, to end an internal rift.
He did not specify whether the reshuffle, which would need his approval, would take place.
The president said a cross-party deal would have to include a calendar for early elections, whose preparation must coincide with Portugal's planned exit from the bailout in June 2014. If the government were to complete its term, the next elections would be held in late 2015.
"The commitment must involve the three parties, all of which signed the bailout deal, to support measures for Portugal to return to the markets in early 2014 and complete the adjustment programme," he said in a televised address.
"I will give my firm support to this deal, which in the current emergency truly represents a commitment of national salvation," he added.
Cavaco Silva said the deal could be reached quickly, possibly with the help of a prestigious personality to promote dialogue.
The rift in the coalition emerged last week after the resignation of CDS-PP leader Paulo Portas as foreign minister and has threatened to derail progress under the 78-billion-euro ($100.3-billion) bailout by the European Union and IMF.
Prime Minister Pedro Passos Coelho had proposed to promote Portas to become his deputy in a bid to end the crisis.
The president's proposal could prolong uncertainty as it was not the simple approval that had been expected of the cabinet reshuffle.
UNEXPECTED DECISION ADDS UNCERTAINTY
The yield on Portugal's 10-year bonds jumped to over 8 percent last week from around 6.4 percent but had settled back as the coalition tried to end the crisis.
"Given the expected scenario of a mere cabinet reshuffle and nothing more, the solution proposed by the president seems to cause greater political instability, which could be received badly by markets," said Filipe Garcia, the head of Informacao Mercados Financeiros consultants in Porto.
Bank of Portugal Governor Carlos Costa earlier on Wednesday warned parties that "accidents" like the political crisis are likely to cause "hyper-reactions in markets.
Jeroen Dijsselbloem, head of the Eurogroup of euro zone finance ministers, warned Lisbon on Monday that more upheaval could upset its efforts to complete the bailout programme.
Representatives of the troika of lenders - the EU, the European Central Bank and the IMF - were due to land in Lisbon on July 15 to conduct the eighth quarterly review of the programme.
The Socialists had urged the president to call a snap election, but he has so far declined to do so.
Cavaco Silva said that holding a snap election would have delayed approving the 2014 state budget until March, increasing the risk of Portugal being forced to request a second bailout programme.
"A new programme would likely be more demanding and have harder conditions than the current one, with direct and dramatic effects in families' daily lives," he said.
Massive tax hikes and spending cuts under terms of the bailout have pushed Portugal into its deepest economic slump since the 1970s and boosted unemployment to record levels near 18 percent.
The Social Democrats and the CDS-PP said they would consider the president's proposals before responding. Cavaco Silva said he will contact the three parties to analyse the solution.
(Additional reporting by Sergio Goncalves, editing by Axel Bugge, Michael Roddy and Cynthia Osterman)
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