UPDATE 2-Portugal budget talks collapse, threatening crisis

* Finance minister says there will be no further talks

* Bond spreads widen on news talks ended without deal

* Portugal may be forced to seek rescue early 2011-analyst

(Updates with quotes, analyst, background throughout)

By Sergio Goncalves

LISBON, Oct 27 (BestGrowthStock) – Budget talks between Portugal’s
Socialist government and the main opposition party ended on
Wednesday without a deal, raising the risk of a political and
financial crisis in one of the euro zone’s weakest members.

Because the government of Prime Minister Jose Socrates lacks
a majority in parliament, it needs the opposition Social
Democrats (PSD) to agree to support its budget bill or abstain
from the vote to ensure passage.

They have been at loggerheads over how to cut Portugal’s
swollen deficit, with the PSD insisting that spending cuts
should have priority and the government preferring a more
balanced approach that includes tax hikes.

Portugal’s partners in the 16-nation currency bloc have
heaped pressure on both sides to strike an agreement before a
first vote in parliament on Nov. 3, but the talks collapsed on
Wednesday without a consensus.

Socrates has threatened to resign if the budget is not
approved and ministers have warned that Portugal could be forced
to seek a financial rescue, as Greece did earlier this year.

“The negotiations ended and there is no agreement,” said a
PSD spokesman.

Finance Minister Fernando Teixeira dos Santos said there
would be no further talks. He said the government had been
unwilling to abandon its deficit goals in the face of PSD
pressure and warned Portugal would face a financial crisis if
the budget was not passed.

“The scenario that I see if that happens is very worrying,
it will push the country into a very deep financial crisis,”
Teixeira dos Santos said.

The spread between Portuguese 10-year bond yields and German
benchmark issues shot to 332 basis points, up from 312 earlier
in the session, on news the talks had ended without a deal.

After hitting lifetime highs at the end of September, the
spread — a gauge of investor sentiment on the country’s
financial health — narrowed in recent days on hopes of a budget
compromise.

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Portugal’s plans to cut budget deficit [ID:nLDE69C1D0]

Next steps in Portugal’s budget process [ID:nLDE69C1XM]

Opposition statements on budget [ID:nLDE69D1GU]

Europe’s debt crisis [ID:nLDE68T0MG]

Graphic on Europe debt crisis: http://r.reuters.com/hyb65p

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FORCED TO SEEK RESCUE

Rui Barbara, an economist at Banco Carregosa, said this
could well mean that Portugal will have to seek financing from
international institutions.

“Without this agreement to approve the budget we are going
to go through a very difficult political and financial
situation, and there is a possibility that the IMF will come,
possibly at the start of 2011,” Barbara said.

Eduardo Catroga, the PSD budget negotiator, said his party
had made proposals which were rejected by the government and
that until Tuesday he had thought an agreement was possible.

“The government wants to sacrifice the country without doing
its home work to cut spending,” Catroga told reporters after the
talks ended Wednesday morning.

The PSD said its national political commission, which will
decide how the party votes on the budget, would meet at 5 p.m.
(1600 GMT) and make a statement afterwards.

President Anibal Cavaco Silva said he would hold a meeting
on Friday of the state council — an organ which offers him
advice on key political matters — to discuss the budget and the
political situation.

(Reporting by Sergio Goncalves; writing by Axel Bugge;
editing by Noah Barkin)

UPDATE 2-Portugal budget talks collapse, threatening crisis