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Bonds News

FACTBOX-Key political risks to watch in Portugal

LISBON, Oct 4 (Reuters) - Portugal’s minority Socialist government is struggling with fiscal and economic challenges, the threat of the euro zone debt crisis, and the need to keep its pact with the opposition alive.

Prime Minister Jose Socrates had to unveil extra austerity measures last week, which included a rise in value-added tax and a sharp cut of 5 percent in civil servant wages.

The move has put at risk a pact with the opposition Social Democrats, which the government relies on to pass legislation in parliament. The Social Democrats say they will not accept tax hikes in the 2011 budget.

The latest austerity measures, which follow other belt-tightening moves in May, have raised risks considerably as so-far docile unions reacted by saying they plan to hold a general strike on Nov. 24.

Portugal’s risk premium, or the spread in yields on its 10-year bonds versus German Bunds, hit euro lifetime highs in the late September as concerns over its budget rose and worries over Ireland spilled over to other periphery euro zone states.

Below are some political risk factors to watch:

CROSS-PARTY PACT MAY BE AT RISK

At one stage early this year, the possibility arose that Socialist Prime Minister Jose Socrates’ minority government would collapse as the crisis hit with full force. Over the summer that prospect subsided after the Social Democrats agreed to a first set of fiscal measures.

But it has reemerged in the past two weeks as data showed efforts to cut spending had been lacking. The government announced tougher austerity mrasures but the Social Democrats have dug in their heels, insisting they will not pass the 2011 budget in parliament if it includes tax increases. [ID:nLDE6930FK].

A poll showed the Portuguese do not like the belt-tigthening but think parliament should approve it. [ID:nLDE691039].

The government has said that if the budget, which has to be presented to parliament by Oct. 15 and passed by the end of November, is not approved it will not be in a position to continue to govern.

Because of Portuguese electoral rules, a snap election in the case that the government falls cannot be called until at least March next year.

The minority Socialist government’s normal term finishes at the end of 2013.

What to watch:

-- The presentation of the 2011 budget bill, by Oct. 15, and the subsequent reaction.

-- How the Social Democrats react when the budget is presented is key. They have said they insist on no more tax hikes but have also said they will give their final opinion on the budget only when it arrives in parliament.

-- Signs of concessions by either the government or the Social Democrats on their positions on the budget.

DEFICIT CUT TEST AND GROWTH

The government’s additional measures, announced at the end of September after the European Union piled pressure on Lisbon to act, aim to cut the budget deficit to 7.3 percent of gross domestic product this year from 9.3 percent in 2009.

In 2011 the government has promised to cut the budget further to 4.6 percent of GDP.

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. Next year it sees growth of 0.5 percent.

Government officials reiterated the growth forecasts after the latest round of austerity plans, but the Bank of Portugal in July cut its 2011 economic growth estimate to just 0.2 percent from 0.8 percent.

Even though Portugal’s public debt -- expected to end 2010 at about 84 percent of GDP -- 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.

What to watch:

-- Budget execution statistics have shown that the core state sector deficit rose 5 percent in the first eight months of this year from 2009 as spending rose.

-- Signs of slowdown in the economy, including a contraction in credit, which could make budget goals harder to meet.

TAME PROTESTS SO FAR

Protests have been tame so far since the global economic crisis started, despite unemployment rising to 10.6 percent. That may be about to change, however, after a decision by the biggest union to call a Nov. 24 general strike to protest against the latest fiscal measures.

What to watch:

-- Portugal’s largest 750,000-strong CGTP union called the strike and intends to raise protests between now and Nov. 24.

-- The country’s second largest union, the UGT which is close to the Socialist party, has said it is considering whether to join the strike. If it decides to join it could be a sign of rising social discontent.

For political risks to watch in other countries, please click on [ID:nEMEARISK] (Reporting by Axel Bugge; Editing by Angus MacSwan)

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