PREVIEW-Political, growth risks plague Portugal 2011 budget

* Opposition wants deeper spending cuts

* Failure to pass could spook markets

* Possible new recession seen in 2011

By Axel Bugge

LISBON, Oct 13 (BestGrowthStock) – Portugal’s minority Socialist
government presents a crucial austerity 2011 budget to
parliament on Friday amid doubts it can muster the support from
the opposition to pass the draft and avoid a political crisis.

Passage of the budget, which promises austerity in 2011 that
could tip Portugal back into recession, depends on whether the
government can reach an agreement with the centre-right Social
Democrats (PSD) to gain their support in parliament.

The government, which rules without a majority, has failed
to persuade the PSD, which says it will not support tax hikes,
saying the onus has to be on spending cuts.

Prime Minister Jose Socrates has said he will resign if the
budget is not passed and the PSD will only give a definitive
stance once the budget is presented. The row has left the
country fearing a political crisis. [ID:nLD69B11S]

The government, facing pressure from Brussels to ensure it
meets budget goals, has already said it intends to cut civil
servant wages by 5 percent next year and raise value-added tax
to 23 percent from 21 percent.

But possibly more importantly, the budget must convince
financial markets — who have pushed up Lisbon’s relative cost
of borrowing to euro lifetime highs — that it can avoid the
sort of trouble that drove Greece to seek aid earlier this year.

Portugal and Ireland are now the two countries in the firing
line in the euro zone’s battle with debt and banking weakness.

“One of the main reasons why Portuguese public finances are
in focus is because we don’t know if the opposition will back
the budget,” said IHS Global Insight economist Diego Iscaro.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For stories on Europe's debt crisis, click on: [ID:nLDE68T0MG] For a factbox on plans to cut budget deficit: [ID:nLDE69C1D0] For a graphic on Europe's debt crisis, click on: http://r.reuters.com/hyb65p ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

OPPOSITION CUTS

At a projected 85.9 percent of gross domestic product in
2011, public debt is far below Greece’s roughly 140 percent.

The austerity measures aim to cut the budget deficit to 4.6
percent of GDP next year from 7.3 percent in 2010 and 9.3
percent in 2009. The details of how the government hopes to
achieve this will be presented in parliament on Friday but shown
to political opposition leaders on Thursday.

Unions are furious and plan a general strike on Nov. 24. to
protest against austerity. [ID:nLDE6962BR].

Social Democrat leader Pedro Passos Coelho has said he wants
sharp cuts in operating expenditures by the public sector, such
as external consultancy fees and communications costs. His party
wants cuts in public-private partnerships, covering large
infrastructure projects such as hospitals, rail lines and roads.

The final outcome of the political and budget situation
looks likely only to be decided by talks in parliament between
the opposition and the government and final voting on Oct. 29.

What is certain, say economists, is that the budget could
potentially push the economy back into recession after growth
this year the government expects to top 1 percent.

“The measures (in the budget) will have a negative impact on
domestic consumption and growth in 2011,” said Rui Barbara, an
economist at Banco Carregosa.

“In this way, the succession of (austerity) measures, if the
budget is approved, (growth) will depend on exports next year.
That will be the key.”

CREDIT TIGHTENING

Analysts at Banco BPI said in a research report that credit
is already tightening, choking off investment.

“Combined with that, there is likely to be an immediate
increase in savings considering the likely advance of the more
demanding austerity measures announced by the government to be
included in the 2011 budget,” Banco BPI said.

Unemployment is already at its highest in two decades, at
10.6 percent.

The government stands by its forecast of 0.5 percent growth
next year, even with extra austerity, but the Bank of Portugal
has said export growth slowed in the third quarter as Portugal’s
main export market, Spain, struggled to break out of recession.

“It makes one wonder where growth is going to come from,”
said Iscaro. “If growth comes out weaker, the government may
have to cut more. It can become a vicious circle.”

The budget will also include other measures announced last
week, including a rise in civil servants’ pension contributions
and an elimination of their transport subsidies. [ID:nLDE6971H8]

The finance minister has said a bailout could become
necessary if Portuguese 10-year bond yields rise above 7 percent
— they are currently around 6.35 percent.

“It will be difficult for Portugal to hang on one more year
financing itself at rates above 6 percent,” said Barbara. “If
this continues to be the case there will have to be external
help, from the EU or IMF.”

PREVIEW-Political, growth risks plague Portugal 2011 budget