By Axel Bugge
LISBON (Reuters) - One could almost forget that Portugal is in the midst of a wrenching economic crisis looking at Prime Minister Pedro Passos Coelho's popularity, a struggling opposition and foreign investors returning to the country.
The country is finally starting to see some benefits from tough austerity under a 78-billion-euro ($103 billion) EU/IMF bailout, winning high marks for its economic reform drive and drawing investments that suggest light at the end of the tunnel.
Lisbon managed to sell new 18-month Treasury bills at an auction on Wednesday in a successful test of market appetite for the longest-dated debt issued since it was forced out of the bond market in March 2011.
A year since the previous centre-left Socialist government was forced to seek a bailout, Passos Coelho's success in implementing the tough austerity plan without strong opposition has defied political gravity.
Centre-right parties won a snap election in June after Socialist Jose Socrates' government collapsed, unable to enact policy as it lacked a parliamentary majority.
It fell to Passos Coelho to launch the deep spending cuts and tax hikes required by the bailout, which has sent Portugal into its deepest recession since the 1970s and pushed the jobless total to record levels.
Yet his centre-right Social Democrats remain almost as popular as when they were elected last June.
At the same time, trade unions have failed to mount a strong challenge to austerity, garnering only slim support for a general strike last month.
The opposition Socialists, who negotiated the bailout agreement before last year's election, are tied to its terms and have made little impact under new leader Jose Seguro. The party has suffered growing divisions over labor market and regional council reforms required under the rescue.
Passos Coelho's success in maintaining broad support for painful reforms - including chipping away at cherished workers' rights through labor legislation - may have marked a political transition in Portugal.
"In terms of our political culture that depends so much on the state, what is going on is politically quite remarkable," said Miguel Monjardino, professor of grand strategy at Lisbon's Catholic University.
"Passos Coelho is the first Portuguese prime minister in a very, very long time who has told the country the truth."
The straight-talking premier drove home in his campaign last year that hard times were ahead and has peppered his public statements since then with phrases like "national emergency".
The European Union has been impressed. Brussels has promised that Greece's private sector debt restructuring and second bailout were one-offs that will not be repeated by any other euro zone member. So Portugal, the second-most risky country in the 17-nation currency area, is a test case.
"The fiscal adjustment in 2011-2012 is remarkable by any standards," the European Commission said on Tuesday in a report on the third quarterly review of Portugal's performance under the bailout.
Investors have also taken note, perhaps believing that Portugal's economic cycle is bottoming out. In the past week there have been two takeover bids for Portuguese companies, which followed a successful sale of the state's stakes in two large power companies mostly to Chinese investors earlier.
Last Thursday, the two main shareholders in Portugal's highway operator Brisa launched a takeover bid for the rest of the company and on Friday Brazil's Camargo Correa announced a bid for cement maker Cimpor.
On Wednesday, Portugal sold 1 billion euros of an 18-month Treasury bill at 4.537 percent, well below the level of almost 6 percent just before it withdrew from the bond market. Demand was healthy for both 6-month and 18-month bills.
Elisabeth Afseth, fixed income analyst at Investec Capital Markets in London, said the bond auction was positive "but it's still very early to tell if Portugal will be able to return to bond markets in September next year."
The EU's top economic official, Olli Rehn, hinted that such a return might be only partial or require assistance, telling Finland's MTV3: "It would be wise to be prepared that some kind of bridge needs to be built when Portugal returns to the markets".
"HOW DID WE GET HERE?"
This is all serving to bolster Passos Coelho's standing, not least because the Socialists have become increasingly fragile as they struggle to find their own political voice.
"As much as the Socialists protest (at austerity), the response will always be 'how did we get here?'" said political analyst Viriato Soromenho Marques. "The government has a margin of manoeuvre because of Socrates' legacy."
Despite the harsh situation - the economy is expected to contract by 3.3 percent this year - many voters seem to agree that a deep change was necessary to alter Portugal's course, which was fuelled by growing indebtedness before the crisis hit.
Unlike in Greece, there is no sign of radical parties of the far left or right capturing protest votes in Portugal.
"Given the seriousness of the situation we got into, these austerity measures would have had to be carried out whether we were governed by the Socialists or by the Social Democrats," said Maria Helena, a civil servant. "They have to be done."
Civil servants have been especially hard-hit as the government effectively cut two months of their wages this year.
Most economists think Portugal will have to seek more bailout funding as the country will be unable to return to bond markets in 2013 as envisaged.
If that turns out to be true, Passos Coelho will need to retain every bit of his political capital, not least because aid would be conditional on more austerity measures.
Monjardino says Passos Coelho has an unusual modesty that makes the Portuguese accept him, such as his decision to continue living in his flat in a typical apartment block on the outskirts of Lisbon after becoming prime minister.
"It has to do with the way he talks, governs and lives," said Monjardino. "As long as he can maintain that bond of trust with the country he can continue doing what he wants."
(Additional reporting by Andrei Khalip and Daniel Alvarena; Editing by Paul Taylor)