LISBON, Portugal - Portugal's president on Monday began two days of consultations with the country's political parties before deciding whether to call a snap election.
The resignation of two key ministers last week, due to disagreements over budget austerity policies, left the centre-right coalition government on the verge of collapse.
Opposition parties are demanding elections two years ahead of the scheduled ballot, but President Anibal Cavaco Silva could instead give his blessing to the prime minister's proposal for a Cabinet reshuffle intended to restore harmony between the squabbling coalition partners.
The two parties in the coalition fell out over the deeply unpopular debt-cutting measures the country is required to enact in return for its 78-billion-euro ($100 billion) bailout two years ago.
The junior Popular Party wants greater emphasis on economic growth policies, and its leader, Paulo Portas, quit as foreign minister after his demands were ignored. Finance Minister Vitor Gaspar, a technocrat brought in to straighten out public finances, also resigned, saying his austerity policies lacked political and public support.
The dispute briefly sent European stock markets lower last week as investors feared a new flare-up in the debt crisis afflicting the 17 countries, including Portugal, that share the euro currency.
The bailout program of austerity measures — which include steep tax hikes, pay and pension cuts and the reforms scrapping long-standing labour rights — is due to be completed by June 2014. It is supposed to restore investor confidence in Portugal so that Lisbon can start borrowing again on wary international bond markets, but the political spat amplified fears the Portuguese will need more financial aid beyond next year.
Klaus Regling, the head of Europe's bailout fund, urged Portugal to abide by the bailout agreement despite criticism of its terms from trade unions and business leaders. The economy is expected to shrink for the third straight year in 2013 and the jobless rate has climbed to 17.6 per cent.
"Staying on the course of reform is absolutely the key to regain market access and credibility," Regling said in an interview with Japan's Nikkei economic daily published Monday.
The government reduced the budget deficit to 6.4 per cent last year from 10.1 per cent in 2010.
"It would be a real shame if Portugal stopped this process now, having already put so much effort and hardship into this adjustment," Regling said.
As head of state, Portugal's president has no direct hand in running the country, which is the job of the government, but he helps to ensure political stability. He can dissolve Parliament and call elections if he believes the government's credibility is damaged.
Cavaco Silva, the president, was due to meet with the governor of the Bank of Portugal, as well as the five parties that have seats in Parliament.
Under the solution presented by Prime Minister Pedro Passos Coelho, Popular Party leader Portas would become deputy prime minister and be placed in charge of negotiations with Portugal's bailout creditors — the International Monetary Fund, European Central Bank and other EU countries.
But the creditors want further cuts in expenditure and Portas' appointment could put Portugal on a collision course with them.
"We know that fiscal consolidation was and still is unavoidable," ECB President Mario Draghi said Monday of Europe's austerity programs.
Geir Moulson in Berlin contributed to this report.