February 19, 2016 / 3:44 PM / in 2 years

Portugal government's leftist ally rekindles debt renegotiation talk

LISBON (Reuters) - Portugal’s Communist Party, which forms part of a shaky alliance in parliament backing a minority Socialist government, will present a legislative proposal in coming days to renegotiate the national debt burden.

A previous government had to seek a bailout from the European Union and International Monetary Fund during the euro zone debt crisis in 2011. It was not clear whether the Communist proposal envisages renegotiation with these official lenders or also with private bondholders.

Communist lawmaker Paulo Sa told TSF Radio on Friday his party expected to propose a debt renegotiation during discussions in parliament of this year’s budget bill, which the moderate Socialist administration had to alter recently after pressure from Brussels to meet EU fiscal rules.

The budget debates in parliament begin on Monday and are set to continue to late March.

The Socialists came to power in November promising to reverse austerity imposed by the previous center-right administration under the 2011-2014 bailout. They rely on support from the Communists and Left Bloc to pass bills.

The two far left parties have long advocated debt renegotiation, but their treaty with the Socialists made no mention of such proposals. The government has promised to observe budget controls to reduce deficits and debt.

“Soon, the Communist Party will present in parliament a legislative initiative with a view to renegotiate debt, which is urgently needed for the country to be able to develop and continue on the path of income recovery and improving life conditions of the people,” Sa said at a TSF-hosted discussion.

The daily newspaper “i” said on Friday that the Left Bloc had an internal strategy document which suggests the party will not approve the 2017 budget without a debt restructuring, and criticizes the government for concessions already made to Brussels in this year’s budget.

But at the same TSF event, Left Bloc lawmaker Pedro Felipe Soares said his party was hoping to assess the sustainability of debt jointly with the Socialists, as envisaged by their alliance.

Many analysts say rising pressure to adopt belt-tightening measures could derail the alliance between the Socialists and their leftist allies. Differences over debt sustainability could make the alliance short-lived.

Doubts about fiscal credibility contributed to a jump in Portuguese bond yields last week when investors, already worried about European banks and the world economy, singled Portugal out as a weak link in the euro zone.

Yields have retreated this week, but are still much higher than where they started the month.

Reporting by Andrei Khalip; Editing by Ruth Pitchford

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