LISBON, June 6 Portugal's centre-right PSD party was expected to work fast on Monday to form a majority coalition government with its traditional allies, the rightist CDS-PP, to implement the country's bailout programme.
PSD's convincing victory on Sunday -- with 39 percent of the vote -- ended months of political uncertainty following the collapse of the minority Socialist government in March when it failed to pass its latest austerity package in parliament.
Submerged in an acute debt and political crisis, Portugal received a 78-billion-euro bailout last month from the European Union and IMF, whose terms include higher taxes, spending cuts and privatizations that will weigh on the economy.
"No time to take a breath ... Today, the PSD and CDS-PP have to start working on a coalition pact and a government that would have enough quality and experience to implement and ambitious but difficult programme," business daily Diario Economico said in an editorial.
CDS-PP leader Paulo Portas said he was ready to rule together with the Social Democrats.
Portuguese stocks opened higher on Monday [ID:nLDE75508M]. The 10-year bond yield rose slightly from Friday's close to 10.45 percent, but analysts expected investors to react positively.
"The biggest risk of hung parliament is out of the way, so we should have a rather safe government, a coalition government. I'd say it is as good as it gets -- there should be positive underlying impact from the election," said David Schnautz, debt strategist at Commerzbank in London.
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SHOULD BE ABLE TO ACT FAST
A centre-right coalition government should be able quickly to enact reforms and austerity measures included in the bailout, such as sweeping tax rises and deep spending cuts, to reduce Portugal's large deficit and debt. "The next thing to see will be obviously how quick do we get some unpopular decisions and how big is the backlash in the society," Schnautz said.
Portugal faces its highest level of unemployment in three decades and the economy is expected to contract two percent both this year and next, presenting the new government with tough challenges as disposable incomes fall.
The PSD has long defended lower government spending, which the Socialists have managed to reduce only slightly, focussing instead on higher revenues.
The PSD also advocates a smaller role of the state in the economy and privatizations of state companies. Sell-off of state properties is part of the bailout programme.
Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said the election results were convincing and would help investor sentiment, but economic problems will be there to stay for a long time.
"This major result will allow the right to pass more unpopular measures," Garcia said.
"The PSD has committed itself to implementing the bailout terms and that's what they'll do in the coming months ... But the pact does not solve the country's problems, does not bring growth and the success of the government's economic policy will depend very much on the Europe-wide sovereign debt crisis."
Results showed the PSD won 105 seats while the rightist CDS party obtained 24, allowing the two traditional government allies a strong majority in the 230-seat parliament.
So far there have been few strikes or protests against austerity measures in Portugal, unlike Greece and neighbouring Spain, but analysts say that could change as the recession deepens.
(Additional reporting by Shrikesh Laxmidas; Editing by Sonya Hepinstall)