UPDATE 3-Portuguese parties want early election in May

Fri Mar 25, 2011 2:36pm EDT

* PM's resignation seen leading to snap election * Decision by president unlikely on Friday

* Credit ratings downgraded

* Poll gives lead to Social Democrat opposition

(Recasts, updates with PSD comments, Socrates)

By Andrei Khalip and Shrikesh Laxmidas

LISBON, March 25 (Reuters) - Portugal's political leaders urged the president on Friday to call a snap election in late May or early June after the Socialist prime minister's resignation, rejecting the option of a coalition cabinet.

The crisis could force Portugal to request a bailout from the European Union and International Monetary Fund after months of desperate struggle to avoid one, and make it the third euro zone country to seek aid after Greece and Ireland. [nLDE72N0NZ]

Prime Minister Jose Socrates' resignation was sparked by parliament's rejection on Wednesday of his minority government's austerity measures aimed at averting a bailout.

Pedro Passos Coelho, the leader of the main opposition Social Democrats (PSD) party that leads opinion polls, said he had suggested a May 29 election date during talks with President Anibal Cavaco Silva -- the earliest date possible by law.

"I told the president that in our opinion the way to overcome the political crisis... is to call an early election. We are convinced the election has to take place as soon as possible and we proposed May 29," he told reporters.

Earlier, other opposition party leaders suggested a May 29 or June 5 election. None mentioned a coalition -- an option the president has to consider but which analysts deem extremely unlikely.

The political crisis prompted Standard & Poor's and Fitch to downgrade Portugal's credit ratings and pushed Portuguese debt yields to record highs. [ID:nL3E7EP027]

S&P's two-notch cut, which came with a warning it could downgrade the debt-laden state further as soon as next week, depending on the final shape of the euro zone bailout fund, hit the euro. S&P now rates Portugal lower than Ireland.

European leaders agreed a new package of anti-crisis measures at a two-day summit, but delayed increasing their rescue fund until June and acknowledged they faced new threats from the Portuguese political crisis. [ID:nLDE72O009]

A sell-off in Portuguese bonds pushed the yield on its 10-year benchmark above 8 percent, a euro lifetime high and a cost of funding that is widely viewed as unsustainable.

The spread between Portuguese debt and safer German Bunds widened 13 basis points to 474 bps, while the cost of insuring its debt against default also rose. [ID:nLDE72O0G2] [nLDE72O0QE]

SOCRATES AT EU SUMMIT

Cavaco Silva's next move will be to summon his Council of State advisory body. He can then dissolve parliament and call an election. His final decision is unlikely to come on Friday.

Socrates is likely to stay on as a caretaker prime minister with limited powers until a new government is formed.

Attending the European Union summit in Brussels, Socrates reiterated Portugal needed no bailout and would continue to issue debt despite yields considered as prohibitive by analysts.

"Portugal does not need any rescue fund or foreign help and it will defend itself... Portugal has the conditions to finance itself in the market," Socrates said, insisting a bailout would hurt the economy and mean more sacrifice for the Portuguese.

PSD's Passos Coelho said earlier he would prefer the country avoid a bailout and has committed himself to meeting the budget deficit goals promised to Brussels. His party has not said clearly how it plans to meet the budget goals but has not ruled out raising value-added tax.

Rating agency Moody's on Friday maintained Portugal's A3 grade with a negative outlook, citing "strong commitment to fiscal consolidation by both leading political parties".

"Whatever government will come, it will take very similar measures, because the situation is very difficult now," said Andre Freire, a political scientist at the University of Lisbon.

"What seems to be sure is that the bailout is coming because the situation now is very bad, the interest rates are going up... It's a matter of time," he added.

An opinion poll on Friday showed the PSD would win an absolute majority if elections were held today. [ID:nLDE72O0K6]

The Socialists' fall has left Portugal in limbo, with legal experts guessing whether a caretaker government could ask for an international rescue if needed. Portugal has a large volume of debt maturing in the next few months. [ID:nLDE72N1RZ]

Most economists agree Lisbon should be able to repay around 4.3 billion euros ($6.05 billion) of bonds falling due in April, but 4.9 billion euros due in June may trigger a request for aid. (Additional reporting by Axel Bugge and Magda Wellmont; Editing by Jon Boyle)

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