Portuguese Prime Minister Pedro Passos Coelho said on Thursday he had reached an agreement to save his government, which had been at risk of collapse after this week’s resignation of the foreign minister over austerity policies.

“A formula has been found to guarantee the stability of the government,” Passos Coelho said after meetings with Paulo Portas, who stepped down as foreign minister, and President Anibal Cavaco Silva.

The daily Publico said Portas had decided to stay in the government.

Portas heads the conservative-nationalist CDS-PP, junior coalition partner of Passos Coelho’s centre-right Social Democratic Party (PSD).

A rupture between the two parties would deprive Passos Coelho of his parliamentary majority and make it difficult for him to continue implementing unpopular austerity policies agreed under a 78-billion-euro ($101 billion) bailout granted by the European Union and the International Monetary Fund in 2011.

The coalition agreement was expected to involve a cabinet reshuffle, greater power for the CDS-PP and possibly relaxing some austerity policies.

Cavaco Silva was due to meet next week with representatives of the parliamentary parties.

Socialist opposition leader Antonio Jose Seguro had called for early parliamentary elections to coincide with September 29 local elections, after meeting on Wednesday with Cavaco Silva.

Portas quit on Tuesday after the resignation of finance minister Vitor Gaspar, who said he had failed to meet budget deficit targets set under the bailout programme.

Portas said he disagreed with the choice of Gaspar’s successor, treasury secretary Maria Luis Albuquerque, who was expected to maintain the government’s austerity drive.

The government crisis has sent stock markets reeling and provoked caused in Brussels.

Spending cuts and economic reforms based on EU-IMF guidelines have seen Portugal reduce borrowing costs and cut the budget deficit from 10.1 per cent in 2010 to 6.4 per cent of gross domestic product last year.

Portuguese economy has been in recession for two years and is forecast to shrink by 2.3 per cent this year. Unemployment has climbed to nearly 18 per cent.

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