By Axel Bugge
LISBON (Reuters) - Portugal's months-long political uncertainty enters a new phase on Wednesday with the inauguration of a center-right president who will assume powers next month that allow him to fire the government and call new elections.
Raising the stakes for the Socialist administration to keep the recovery on course and its far-left allies happy, Marcelo Rebelo de Sousa won the Jan. 24 presidential vote promising to repair divisions and the hardship of Portugal's bailout.
Inconclusive elections last October culminated in the creation of a Socialist-led administration propped up by the far-left. They have promised to roll back austerity imposed by their conservative predecessors but have watched investment start to fall and past declines in joblessness peter out.
Under the semi-presidential constitution, a president cannot dissolve parliament for six months after a national election.
That right will be restored in early April, marking a big shift for Prime Minister Antonio Costa, who - because it was too soon to call snap elections - engineered an unconventional grab for power by teaming up with the Communists and the Left Bloc.
"He (Rebelo de Sousa) will be somebody who actively checks on the government," Teneo Intelligence's Antonio Barroso said. "There will be an additional veto point for Costa."
Many analysts say the government could indeed be shortlived as the Socialist's leftist allies push to roll back austerity, challenging Costa's efforts to cut the budget deficit to meet targets agreed with Brussels, as he has promised.
Costa has started to reverse austerity, including hiking civil servant wages and the minimum wage. But he had to find nearly one billion euros in additional indirect taxes when Brussels last month insisted on deeper budget cuts.
"The budget problems are very complicated, there are many internal and external risks," ISEG Lisbon School of Economics & Management professor, João Cantiga Esteves, said.
Economic challenges are mounting. Unemployment has ended its downward trajectory that started in 2013 and investment fell in the fourth quarter of 2015, potentially undermining future growth. Spain, a major engine for Portugal's economy, is not helping as it too grapples with political uncertainty.
For Portugal, which saw bond yields rise sharply in February, the risks are clear. Fitch, the first main ratings agency to look at Portuguese debt in coming weeks, downgraded its outlook to "stable" from "positive" on Friday.
European Economic and Monetary Affairs Commissioner Pierre Moscovici visits Lisbon this week to discuss more budget measures. Costa says more measures are unnecessary.
"It's very difficult to implement what Brussels wants when you have partners who fundamentally oppose fiscal consolidation," Teneo Intelligence's Barroso said.
(Editing by Louise Ireland)