By Axel Bugge
LISBON (Reuters) - Portugal will elect a new government on Sunday which will lead the country through a period of deep austerity and recession after it received a 78-billion-euro ($114 billion) bailout from the European Union and IMF.
The election will end a period of political and financial turmoil that started with the collapse of the Socialist government in March and led Lisbon to become the third country in the euro zone to seek a bailout after Greece and Ireland.
The Portuguese, who face unemployment at its highest level in three decades, are expected to reject caretaker Prime Minister Jose Socrates and turn to opposition center-right Social Democrat leader Pedro Passos Coelho.
The latest polls have given Passos Coelho around 37 percent support compared with 31 percent for Socrates, which will most likely mean that the Social Democrat will need to team up with the small rightist CDS party to form a majority in parliament.
Antonio Barroso, Europe analyst at Eurasia, said such a rightist coalition government was the most likely election outcome.
"This would be the most straightforward option if the Social Democrats and CDS can secure an absolute majority between them," Barroso said in a research note.
"Both parties are strongly committed to the implementation of the bailout conditions and would easily negotiate a common economic programme."
The CDS has about 12 percent backing in polls.
The formation of such a center-right government would be welcome by investors, who lost faith in the country in the past few months, dumping its bonds and sending borrowing rates to euro-era highs.
A center-right government would be able to quickly enact reforms and austerity measures included in the bailout, such as sweeping tax hikes and deep spending cuts, to ensure the country reduces its large debts.
But Portugal's economy is expected to contract two percent both this year and next, raising tough challenges for any incoming government as the disposable incomes of the Portuguese decline as austerity takes its toll.
So far there have been few strikes and protests against the austerity, unlike in Greece and in neighboring Spain, but as the country's recession deepens that could change, analysts say.
There could also be growing discontent as the incoming government will have to launch widespread privatizations in an effort to cut state costs under the terms of the bailout.
Socrates, who stayed on as caretaker prime minister since he resigned in March, was half way through his second term when his minority government collapsed, worn down by the sovereign debt crisis and the dire state of the economy.
Both Socrates and Passos Coelho blamed each other for the bailout in the election campaign but the Portuguese appear to mostly hold Socrates responsible for the poor economy.
(Reporting by Axel Bugge; Editing by Angus MacSwan)