UPDATE 2-Portuguese government defeats no confidence motion

Wed Apr 3, 2013 2:56pm EDT

* Centre-right government has comfortable majority

* But motion united the left and rattled markets

* All eyes on Constitutional Court ruling on budget

By Andrei Khalip and Daniel Alvarenga

LISBON, April 3 (Reuters) - Portugal's government defeated a no confidence motion on Wednesday, yet the move united all the opposition in parliament against austerity policies and rattled the stock market.

The vote was largely symbolic as the ruling centre-right coalition holds a comfortable majority, but Prime Minister Pedro Passos Coelho said the motion gave the impression of political instability just when Lisbon needs investor confidence to regain full access to debt markets.

The main opposition Socialists and the two smaller left-wing parties voted for the motion, garnering 97 votes in a 230-seat house. They accuse the government of pushing ahead "blindly" with cuts despite the worst recession since the 1970s and record unemployment.

Portuguese stocks, especially banks, slumped as the vote added to concerns the government's budget plans - required under the terms of under an EU/IMF bailout - may suffer defeat in the Constitutional Court.

Some banks' shares fell by nearly 9 percent and the PSI 20 index dropped over 3.5 percent in the worst slump in Portuguese stocks in a single day since last year.

Local media reports have suggested the government could resign if the court finds most measures unconstitutional. The main ruling party has said it had not considered stepping down.

Passos Coelho said he would stick to compliance with the bailout programme and accused the opposition of creating a "climate of political instability".

"This radical behaviour can only bring unrest to the Portuguese, and fears and doubts to our external partners and investors in general," he said. "We will proceed on our path."

RECESSIVE SPIRAL

Socialist leader Antonio Jose Seguro said the government's policies had failed so it was time for a new administration to take the helm and "profoundly renegotiate" the bailout terms.

The no-confidence motion was submitted by the Socialists, whose previous government requested the bailout in 2011. It formalises their change of tack over the past few months towards the conditions imposed under the rescue programme.

"Your government is destroying Portugal and there is only one solution - to replace the incompetent government," Seguro said. "The brand of this government is failure: a country which is in a recessive spiral and increasingly in debt."

Acknowledging the economic headwinds, Portugal's lenders eased Lisbon's deficit targets last month and gave it an extra year, until 2015, to cut 4 billion euros in spending.

Seguro said that was not enough. He said his party was in favour of budget discipline, but was against "blind spending cuts".

Passos Coelho rejected that, saying that renegotiating the programme would only lead to a second bailout and more austerity, for a longer time.

Under the current bailout plan, which runs to mid-2014, the government must reduce its budget deficit to 5.5 percent of GDP this year from 6.4 percent last year, when it missed a 5 percent target. It expects the economy to shrink 2.3 percent in 2013 after a 3.2 percent slump in 2012.

Market players and some analysts say the main concern remains the impending Constitutional Court ruling.

"Today's no-confidence vote ... will put further pressure on the court to say no," said Joao de Deus, a trader at DifBroker in Lisbon.

Still, Portugal's benchmark 10-year bonds recovered some ground lost immediately after the recent crisis in Cyprus which rattled the whole euro zone.

The court will rule soon on the constitutionality of the largest tax hikes in living memory as well as public service pay cuts. Opposition parties have argued that cuts to wages, pensions and welfare benefits undermine workers' basic rights.

While analysts remain watchful of the court decision, many believe that the final ruling, even if it rejects some measures, should be manageable for the government.