UPDATE 1-Portugal’s president in budget talks to avoid crisis

* Talks with parties begin to get budget approved

* Investors wary, bond spreads hit new highs

(Adds quotes after meetings with small parties)

By Andrei Khalip

LISBON, Sept 28 (BestGrowthStock) – Portugal’s president began talks
with parties on Tuesday to try to broker a deal on the 2011
budget and avert a political crisis.

The opposition is refusing to support new tax hikes the
minority government says could be necessary to slash the budget
deficit and soothe investor concerns about the public finances.

The premium investors demand to hold Portuguese bonds rather
than German Bunds rose almost 30 basis points earlier on Tuesday
to euro lifetime highs of 453 bps.

President Anibal Cavaco Silva, who has an important role as
a mediator in state matters despite his largely symbolic status,
has promised to “contribute in the most explicit manner so that
Portugal doesn’t slide into a political crisis, which would have
a very negative effect on the markets”.

His first round of meetings involved three smaller left-wing
parties. He will meet the ruling Socialists and main opposition
centre-right Social Democratic Party (PSD) on Wednesday.

After the meeting, Communist leader Jeronimo da Souza played
down discord over the budget saying it “will be overcome via an
understanding on the right”. The leftist parties have previously
voted against austerity measures and are not expected to support
them now.

Cabinet Minister Pedro Silva Pereira said the minority
government still “considers the PSD its natural partner” as the
budget is the continuation of the austerity plan it had earlier
approved, and expected parliament to approve the bill.

Last week, the PSD rejected a deal with the government to
support the budget, to be presented to parliament by Oct. 15.

Investors are fretting over public debt and deficits in the
euro zone periphery, their concerns exacerbated by tensions over
the 2011 budget in Portugal and fears that the government may
fail to meet this year’s budget gap goal.

The government has promised to cut the overall budget
deficit to 7.3 percent of gross domestic product this year and
to 4.6 percent in 2011 from last year’s highs of 9.4 percent.

FALLING BEHIND

Portugal has so far failed to rein in the central government
deficit, falling behind peripheral issuers like Greece, Spain
and Ireland, also scrutinised by investors. It rose 5 percent in
the first eight months of 2010, while Spain slashed the gap by
40 percent.

The PSD, which earlier this year backed a range of austerity
measures including tax hikes for 2010 and 2011, says the
government has to cut spending and not raise taxes again, be it
via direct increases or reductions of tax benefits.

Finance Minister Fernando Teixeira dos Santos said last week
the draft budget would entail substantial spending cuts but also
measures on the revenue side.

The government’s stance was reinforced by the OECD, which
recommended on Monday that it swiftly consolidate public
finances and stand ready to raise the value-added tax and
property taxes. [ID:nLDE68Q0UZ]

Analysts say the PSD is likely to fall into line and accept
some tax rises after pressure from Cavaco Silva, a former PSD
prime minister and an influential figure in the party.

“I think that basically everyone expects that the PSD will
either support the budget or abstain because if it doesn’t it
will be bad for the PSD, the president, the government and the
country,” said political scientist Andre Freire of the Social
Sciences Research Institute in Lisbon.

If the PSD abstains, the Socialists have enough seats in
parliament to get the budget passed, even if all other parties
vote against it. Failure to have the budget passed by year-end
would undermine the cabinet and further hit Portuguese assets.

Cavaco Silva faces an election in early 2011. His mediation
efforts, if successful, should pay political dividends for him
and the PSD, political analysts say.
(Editing by Janet Lawrence)

UPDATE 1-Portugal’s president in budget talks to avoid crisis