Portugal votes under bailout cloud, centre-right ahead

Reuters News
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Posted: Jun 02, 2011 9:53 AM
Portugal votes under bailout cloud, centre-right ahead

By Axel Bugge and Shrikesh Laxmidas

LISBON (Reuters) - Portugal holds a snap general election on Sunday, which could end months of political and economic turmoil as the next government gets down to enacting tough austerity under a 78-billion-euro bailout.

Polls indicate the opposition center-right Social Democrats (PSD) will get most votes. But they may need to build a coalition to form a government and fill the vacuum that has existed since the collapse of the minority Socialist government in March.

Portugal has been on a roller-coaster since the collapse as it battled a deep recession and euro-era high borrowing rates, and a caretaker administration lacking full powers led the tense bailout negotiations.

Polls indicate Portugal may get a majority government led by the PSD's Pedro Passos Coelho which will have sufficient clout to raise taxes and carry out the required reforms to tame the country's large debts.

Analysts say the most likely outcome is that the Social Democrats get the most votes -- they have about 37 percent support in the latest polls -- and form a government with the rightist CDS party, their historic ally.

"We will probably get a majority government with the Social Democrats and CDS, which is likely to bring political stability," said Adelino Maltez, political analyst at the Social Science Institute at the University of Lisbon.

Although Portugal's main parties all signed off on the terms of the bailout in April before the election, the key for investors will be how much power the incoming government will have to push austerity and reforms forward in parliament.

"The road with this package is long and filled with reforms which may be politically difficult to pass," said Diego Iscaro, economist at IHS Global Insight.

The terms of the three-year bailout include raising taxes across the board, steep spending cuts and reforms to boost competitiveness, all of which is expected to lead to a 2 percent economic contraction both this year and next. It includes strict targets to cut the budget deficit and lower the country's debt load, currently at around 90 percent of output.

Prime Minister Jose Socrates won a second term in 2009 but without a majority had to depend on the Social Democrats to pass legislation, something many analysts say undermined his ability to fend off the sovereign debt crisis and ultimately pushed Lisbon to follow Greece and Ireland to seek a bailout.

"It was precisely the absence of a strong government with a majority that triggered Portugal's request for the bailout, when Socrates' administration collapsed as it could not pass the austerity," said Iscaro.

VOTERS DISILLUSIONED

Most Portuguese are disillusioned with politicians and fear the economic sacrifices to come, whoever wins the election.

"These elections are all about personal quarrels. It seems that our elites are weak and I am pessimistic about my future and that of my country," said Joaquim Maia, 41, a construction worker.

The main candidates have tried to avoid discussing the consequences of the bailout during the campaign, taking the opportunity instead to trade accusations about the mistakes that led to it.

Unemployment at 12.4 percent is the highest on record. So far workers' protests and strikes have been tame but analysts say they could escalate as austerity deepens and the recession bites into household incomes.

Voters' low expectations for the future still pose the risk that the election result will be inconclusive.

Polls show about a third of voters have not yet made up their minds, which means Socrates' Socialists could catch up and push President Anibal Cavaco Silva to promote a broad coalition of the three main parties to avoid continued political instability.

Cavaco Silva is constitutionally mandated to decide who will form the next government but he has no role in government.

"A solution with a broad-based government would become more necessary if the Socialists were to win more votes than the Social Democrats," said Maltez.

(Additional reporting by Daniel Alvarenga, Editing by Sonya Hepinstall)