November 11, 2015 / 6:30 PM / 2 years ago

UPDATE 1-Portugal's Socialists face tough task pleasing hard left, markets, EU

4 Min Read

(Updates with TAP, Fitch)

By Axel Bugge

LISBON, Nov 11 (Reuters) - Portugal's Socialists face a tough task keeping financial markets, euro zone peers and hard-left partners happy if they try to quickly roll back parts of an austerity programme without putting economic recovery at risk.

Together with the Communists and Left Bloc, Antonio Costa's Socialists ousted the centre-right government on Tuesday and, with a majority in parliament, they are hoping the president will ask them to form a government soon.

Costa, as prime minister, will then have to speedily put together a 2016 budget to present to Brussels after Portugal missed last month's deadline, having emerged from a debt crisis and exited a bailout programme only last year.

The Socialists have outlined priorities such as fully restoring public sector wages in 2016 that were cut during the crisis, raising the lowest public pensions, reintroducing four public holidays and raising the minimum wage.

"What we can expect is a set of popular and populist measures in the next six months as a sort of life insurance for this leftist government, so as to avoid an election next year or try to win it," the head of economic consultancy Informacao de Mercados Financeiros Filipe Garcia said.

The Socialists have also promised to eliminate over the next two years an extraordinary 3.5 percent "solidarity" income tax launched during the crisis to shore up government coffers. Value-added tax for the restaurant sector, which was doubled during the crisis, will be cut back to 13 percent.

They are also seen as likely to stop privatisations and moved on Wednesday to reverse the sale of airline TAP, which was set to be concluded on Nov. 12.

The outgoing government agreed in June to sell a 61 percent stake in TAP to a Brazilian-Portuguese consortium. But Costa's Socialists said that as the centre-right government was now in a caretaker capacity, "the legal and political conditions are not present" for the sale to go ahead.

So far, there has been no major move in financial markets, even when Costa promised to lower the budget deficit, to 2.8 percent of GDP next year from 3 percent in 2015.

"The fact that the Socialists will maintain European commitments and reiterate the strategy of budget consolidation, although at a slower pace, is an important signal for international markets," Banco BPI chief economist Paula Carvalho said.

But uncertainty might grow if the new government's policies are not clarified quickly, analysts say, especially details on how they plan to finance their economic strategy.

"The combination of continuing political uncertainty and the advent of a government relying on parties that have hitherto taken an outspoken anti-austerity stance, would increase fiscal downside risk," credit ratings agency Fitch said on Wednesday.

Businesses are concerned that they will face higher taxes, cutting their investment plans and the prospect of hiring more workers in a country that still has 12 percent unemployment.

Government plans to cut corporation tax will almost certainty be axed and the prospect of lower social security contributions by companies is uncertain. Extraordinary taxes on the energy and banking sectors introduced during the crisis might also be extended.

Banco Carregosa's head of investment, Joao Pereira Leite, said the key is for a new government to be installed quickly.

"The Socialist Party ... has already committed to the budget limits and they target 2.8 percent next year, so in principle they are in line with European Comission demands," he said.

"Now, how they are going to get there, and if the European partners accept that, is a question mark." (Additional reporting by Andrei Khalip, Sergio Goncalves and Miguel Perreira; Editing by Louise Ireland and Catherine Evans)

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