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Q+A-Risks to Portuguese government and austerity plan
Wed Mar 17, 2010 11:04am EDT

By Andrei Khalip

LISBON, March 17 (Reuters) - Portugal's minority Socialist government wants to build on the passage last week of its 2010 budget and push through a symbolic vote of support for its longer-term plan to cut the country's swollen budget deficit.

But the vote of confidence in the four-year plan, which the government hopes to secure on March 25, would not guarantee the passage of separate bills that will make up its deficit-cutting programme.

The government's austerity plan calls for the budget deficit to be slashed to 2.8 percent of gross domestic product in 2013 from 9.3 percent last year and markets are watching closely for signs of problems implementing it. [ID:nLDE62G1I3]

Below are some questions and answers about the vote on the austerity plan and the risks to the government:


WILL PARLIAMENT BACK THE 2010-2013 AUSTERITY PLAN?

This outcome appears likely and markets would probably push Portuguese assets higher, reducing the country's borrowing costs.

Market moves since the start of the year have led to a rise in those costs and helped convince the Socialists and the largest opposition party, the centre-right Social Democrats (PSD), that urgent budget consolidation is needed.

The four-year plan, which Portugal has to present to Brussels by the end of March, does not require a parliament vote, but the government hopes approval of a non-binding resolution of support would pre-commit parliament to legislation that ensures the strategy's key goals are met.

The PSD, which has 81 seats in the 230-seat house, abstained in the 2010 budget vote last Friday [ID:nLDE62B1SF], which was enough for the Socialists, who have 97 seats, to pass the bill and political analysts expect the same to happen on March 25.

By abstaining, the PSD signals that it can still put up a fight over individual measures without compromising the overall goals. The right-wing CDS-PP party, with 21 seats, is also expected to abstain, while the smaller left-wing groups will vote against.


WHAT IF PARLIAMENT DOES NOT APPROVE THE RESOLUTION?

This seems unlikely because the PSD does not want to risk being blamed for torpedoing the deficit-cutting plan, which has been well-received by the markets. Rejection would probably have a negative impact on Portuguese assets and push up borrowing costs. If the programme is rejected by parliament, the government can still submit it to Brussels and start implementing the already approved budget for this year, which includes some spending caps like a freeze on public sector wages.

This would make the approval of the 2011 budget a daunting task, with a potential risk of the government collapsing.


CAN THE OPPOSITION THREATEN THE GOVERNMENT DOWN THE ROAD?

The approval of the 2010 budget removed any immediate risk of a government crisis and opinion polls show the opposition would not benefit from an early election now as the Socialists would still win. [ID:nLDE62B0OP].

Still, the government remains on shaky ground.

Much depends on whether the PSD, weakened after two lost general elections and long infighting, can elect a charismatic leader to replace the unpopular Manuela Ferreira Leite, 69.

Of the three candidates, opinion polls favour Pedro Passos Coelho, 45, a trained economist who has already said the future PSD leadership would not feel bound to support the austerity plan if he were elected on March 26.

Still, analysts say the PSD is unlikely to confront the government with a no-confidence motion on key economic measures any time soon, as it first has to improve its popularity ratings, which could take up to a year if the new leader is well-received by the electorate.


WHAT ARE THE OTHER RISKS TO THE GOVERNMENT?

Another risk to the political status-quo lies in a parliamentary probe, due to start this week, into allegations the government tried to interfere in the media sector, including using Portugal Telecom, where the state has an indirect stake, to buy into a television station critical of the administration.

The committee handling the probe is also looking into whether Prime Minister Jose Socrates lied to parliament over the case and should present its findings after two months. Socrates has denied any wrongdoing, blaming political attempts to discredit him.

Minority governments have not lasted long in Portugal. The last Socialist prime minister before Socrates, Antonio Guterres, survived one full term before resigning early in his second term when he only had a minority.

link: http://www.reuters.com/article/idUSLDE62F2FE20100317