One of the most well-known and longstanding arguments against semi-presidential systems is the problem of cohabitation, or the situation where the president and the prime minister are from opposing political groups and where the president's party is not represented in the cabinet. People believe that cohabitation exaggerates tension between the president and the prime minister, leading to conflict and democratic instability. However, recent work questions the relation between cohabitation and democratic instability. These contradictory findings call for a more nuanced approach to the analysis of cohabitation on the consolidation of young democracies. This article tests the effect of cohabitation on the performance of Timor-Leste's nascent democracy. It finds institutional conflict during cohabitation. It also finds that while most institutional conflicts were regulated disagreement between the president and the prime minister over defence policy escalated into serious political instability. The Timor-Leste case suggests that not all conflicts will cause political instability but rather a certain type of institutional conflict. In this new post-conflict state, institutional conflict over defence policy during cohabitation seriously destabilised Timor-Leste's fledging democracy.