UPDATE 1-Bank of Portugal says more austerity measures needed

* Report forecasts contraction of 1.4 pct in 2011

* Says forecasts may change with more measures

(Adds quotes, details)

LISBON, March 29 (Reuters) – The Bank of Portugal warned on
Tuesday of the need for substantial new austerity measures to
ensure the debt-laden country meets budget goals, set to deepen
an expected economic contraction.

The warning adds pressure on Lisbon following the minority
government’s resignation last week after the opposition rejected
its austerity plan in parliament, prompting many economists to
predict the country will need a bailout soon like Greece and

In its spring economic report, the Bank of Portugal said
there were risks of the country missing budget goals this year,
adding that in 2012 the pressure for more measures could be

“In 2012 the additional, permanent measures necessary to
reach the goal promised by the authorities reach a very
substantial size,” the bank said.

The report forecast economic contraction of 1.4 percent this
year and growth of 0.3 percent in 2012 but it said those
projections did not include likely additional austerity measures
and deleveraging in the economy. Last year the economy grew an
estimated 1.4 percent.

“As stated, the necessity of additional budget consolidation
measures and the process of deleveraging should lead to a
significant reduction in the economic growth rate relative to
current projections, especially in 2012,” it said.

“The Portuguese economy is not set to accompany the economic
recovery in Europe, although it should benefit from external
demand,” it said.

Last week parliament rejected government austerity measures,
including a levy on pensions and cuts in health spending,
triggering the resignation of the prime minister. President
Anibal Cavaco Silva is expected to set later this week a date
for a snap election, probably in late May or early June.

Portuguese bond yields are trading around euro lifetime
highs on fears over the country’s public finances.

The Socialist minority government has promised Brussels to
cut the budget deficit to 4.6 percent of GDP this year, down
from around 7 percent in 2010. Next year it is aiming to reduce
the deficit further to 3 percent of GDP.

A series of four austerity plans introduced in Portugal
since the start of the global economic crisis have progressively
tightened the economic screws, with tax rises across the board
and cuts in civil servants’ pay.
(Reporting by Axel Bugge and Andrei Khalip; editing by Stephen

UPDATE 1-Bank of Portugal says more austerity measures needed