UPDATE 3-Portugal to hold snap general election June 5

* President warns of unprecedented economic crisis

* Socrates government to remain in caretaker capacity

(Updates with quotes, background)

By Shrikesh Laxmidas

LISBON, March 31 (Reuters) – Portugal’s president dissolved
parliament on Thursday and set a snap general election for June
5, warning the next government faced an “unprecedented economic
crisis.”

President Anibal Cavaco Silva’s decision came as the country
faces acute economic challenges that threaten to push it to
follow Greece and Ireland in seeking a bailout from the European
Union and International Monetary Fund.

Prime Minister Jose Socrates resigned last week after the
opposition rejected his government’s austerity measures,
prompting downgrades by rating agencies, pushing bond yields to
new euro-era highs and raising pressure on the country to ask
for a bailout.

“I took the decision to call a general election given the
clear degradation of the political situation, shown by the
growing difficulty of the minority government and the opposition
in agreeing on measures to overcome the economic and social
problems Portugal faces,” the president said.

The economic challenges mounted on Thursday as the country
missed its budget deficit goal for 2010.

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“The next government will face an unprecedented economic and
financial crisis,” the president said. “The country’s
difficulties are so deep that nobody can have the illusion that
they will disappear from one day to another.”

All opposition parties and the ruling Socialists had urged
Cavaco Silva to call elections as soon as possible, the
president said.

The opposition had rejected the idea of a coalition cabinet
to avoid an election, and has also ruled out pre-election
alliances, highlighting a dramatic increase in polarization and
antagonism among the parties.

The main opposition, the centre-right Social Democrats, lead
in opinion polls and believe they can win a majority in
parliament. Only one minority government has completed its full
term since Portugal’s decades-long dictatorship ended in 1974.

PRESIDENT SAYS COMITMENTS HAVE TO BE MET

Socrates’ government will remain in power until the election
in a caretaker capacity with limited powers. Finance Minister
Fernando Teixeira dos Santos said Thursday the caretaker
government would not have the powers to seek a bailout.

The president, whose influence is likely to increase until a
new government is elected, said the country has to ensure “the
financing means necessary for the economy to function.”

“The state has to meet its comitments and nobody should
avoid doing what has to be done to protect our future,” he said.

Cavaco Silva urged all parties to cooperate on this matter.
Social Democrat leader Pedro Passos Coelho told Reuters last
week he did not rule out a possible bridging loan if financing
conditions become acute before the election. [ID:nLDE72P0BM]

Economists have focused on two large Portuguese bond
redemptions in coming months. Most of them say the country has
raised enough funds this so far this year to be able to repay
around 4 billion euros ($5.63 billion) in April.

The National Statistics Institute said Thursday the
country’s budget deficit reached 8.6 percent of gross domestic
product in 2010, above a target of 7.3 percent agreed with
Brussels. The news sent yields up sharply to new euro lifetime
highs.

Socrates insists the country can do without a foreign aid
package.

(Writing by Axel Bugge; Additional reporting by Filipa Lima,
Daniel Alvarenga and Sergio Goncalves; editing by Mark
Trevelyan)

UPDATE 3-Portugal to hold snap general election June 5