FACTBOX-Key political risks to watch in Portugal

LISBON, Sept 1 (Reuters) - Portugal's minority Socialist government has struggled on multiple fronts this year as it faced growing fiscal and economic challenges from the spreading euro zone debt crisis.

Prime Minister Jose Socrates has had to break an election promise and raise taxes and now relies on the opposition Social Democrats (PSD) to pass legislation in parliament after a pact with the party to overcome the crisis. The pact has recently become shaky as the PSD has gained sharply in opinion polls.

Market contagion has been especially tough on Portugal, hitting the country first because it is seen as another small risky southern European country like Greece, with a high deficit, mounting debt and a loss of competitiveness, and second because of its proximity to troubled bigger neighbour Spain.

Below are some political risk factors to watch.

CROSS-PARTY PACT MAY BE AT RISK

At one stage early this year there were fears that Socialist Prime Minister Jose Socrates' minority government would collapse as the crisis hit with full force.

However, the pact reached with the main centre-right Social Democrats in May on passing austerity measures in parliament has neutralised most threats to the government and reduced political concerns by creating rare cross-party unanimity.

But, with opinion polls showing the PSD ahead of the Socialists, the centre-right party has recently hardened its stance on several issues, most notably criticising the cabinet for a "spending spree" [ID:nLDE6711O] earlier this year.

It has also battled the government on possible constitutional reform and toll charges on motorways and analysts say the party's message at a conference in July signals it is positioning itself for a snap election next year.

Because of Portuguese electoral rules, such a ballot cannot be called between Sept. 9 and until around the third quarter of next year. That probably suits the Social Democrats, who would prefer the Socialists to stay on longer and enact unpopular measures wearing down their image.

If there is no early vote, the next election is scheduled to take place in the second half of 2013.

What to watch:

-- Parliament's permanent commission meets on Sept. 9 during parliamentary holidays to discuss budget execution during the first seven months of 2010.

-- Parliament reopens on Sept. 15 and lively debate could start on the 2011 budget soon after that.

-- The PSD's proposals for constitutional reform -- deemed too liberal by the government and some Social Democrats -- is also set to be a hot topic when parliament re-opens.

AUSTERITY AND THE 2011 BUDGET TEST

After the euro zone agreed in May on a 750 billion euro safety net fund for member states shut out of capital markets, the government announced it would raise taxes and cut public spending, including the wages of some top civil servants.

The measures are aimed at reducing the budget deficit to 7.3 percent of gross domestic this year from 9.4 percent last year and further to 4.6 percent of GDP in 2011.

The risk is that the austerity could undermine fledgling economic recovery. The government has predicted growth of 0.7 percent this year after the economy contracted by 2.7 percent in 2009. Growth in the second quarter was 1.4 percent year-on-year.

The Bank of Portugal in July cut its 2011 economic growth estimate to just 0.2 percent from 0.8 percent, expecting a sharp slowdown to begin in the second half of 2010 and to intensify next year, maybe even triggering a new recession.

Rating agency Standard & Poor's has said it does not expect nominal Portuguese GDP to return to 2008 levels until 2013.

Even though Portugal's total debt -- 77 percent of GDP in 2009 -- is considerably lower than Greece's, economists worry that it could rise fast in the case of an extended recession. Greece's debt-to-GDP is expected to reach 133.2 percent this year.

Finance Minister Fernando Teixeira dos Santos has promised the debt ratio will start to drop in 2012, but some economists warn it could reach close to 100 percent of GDP in that year.

Another risk, though limited, is that the PSD votes against the 2011 budget, due to be presented in October. That would force the government to seek support from smaller parties or risk upsetting investors by starting 2011 without a budget.

What to watch:

-- Budget execution statistics for July showed a four percent rise in the core state sector deficit in the first seven months of this year from 2009 as spending rose, highlighting the tough task the government faces to rein in the budget gap.

-- Preliminary budget discussions are about to start and may be complicated after the PSD said it would oppose the government's plans to cut income tax benefits. Most analysts say they will allow passage by abstaining, but will seek concessions on other matters in return. The draft budget has to be presented by Oct. 15 to parliament.

TAME PROTESTS SO FAR

Portugal has had no violent protests so far despite unemployment rising to 10.6 percent and analysts do not expect crippling strikes or unrest.

There have been localised strikes but no general strike. Trade union power has been waning in recent years.

What to watch:

-- Portugal's largest 750,000-strong CGTP union says it will intensify labour actions after the end of the summer holidays.

-- On Sept. 29, in coordination with other unions in Europe, the CGTP plans to hold strikes and rallies in various sectors.

For political risks to watch in other countries, please click on [ID:nEMEARISK] (Reporting by Axel Bugge and Andrei Khalip, Editing by Sonya Hepinstall)