Portugal Socialist leader says best placed to form next government

By Axel Bugge and Sergio Goncalves LISBON (Reuters) - Portugal's Socialists are better placed to form a stable government than the center-right, after two far-left parties dropped their opposition to European Union rules on reducing budget deficits, the party's leader said on Tuesday. Political uncertainty in Portugal has risen since an inconclusive Oct. 4 election in which the outgoing center-right government won the most votes but failed to gain a majority in parliament. The Portuguese stock market has slumped in the past two days on the realization that the Socialists might be in a position to form a left-wing government, overturning expectations that the center-right would continue in power. But Socialist Party leader Antonio Costa, who has begun negotiations with both the left and the right, told Reuters in an interview that his party was ready to govern and "turn the page on austerity". Costa said that while the center-right won the most votes, the election showed a "desire for change in politics", as his party, along with the far-left Communists and Left Bloc, had a majority in parliament. "What is clear at the moment is that the Socialist Party is in a better position than the right to form a government that will be stable for the next four years," Costa said. "What I want to transmit, especially to markets, is that Portugal will maintain the stability of its European commitments," he said. After meeting leaders of the Communists and Left Bloc, Costa said the political landscape had changed now that those two parties had dropped their opposition to Portugal's European commitments to budget discipline. "What is clear, and it may be a surprise to many, because it is new, is that for the first time there can be a government that reflects the left's majority in parliament, without posing a risk to European rules," he said. EU budget rules envisage countries reducing their deficits to below 3 percent of economic output and working to reduce them further. Portugal's deficit was 7.2 percent last year. The center-right government introduced tough austerity policies and raised taxes sharply over the past four years as the country struggled through a debt crisis under a bailout. Portugal exited the bailout last year and is now growing again. Costa said negotiations with the two leftist parties were based on the Socialist Party's program, whereas his talks so far with the outgoing center-right government had been based on its plans. He will meet acting prime minister Pedro Passos Coelho for the second time later on Tuesday. "We maintain our position of talking to everybody in good faith," he said, when asked about the talks with the government, adding that the center-right wanted to govern on the basis of its own program. During the election campaign, the Socialists promised to ease up on austerity and increase families' disposable incomes while at the same time respecting EU budget rules. Costa said he hoped to conclude negotiations on forming the next government "in the short-term", adding that talks with the leftist parties had so far only been about policy programs and not the composition of a potential administration. "Naturally it is also up to us, bearing in mind the lack of success (of the center-right), to strive for a government that is stable during the next four years and delivering the change the election results unequivocally showed," he said. (Reporting By Axel Bugge; Editing by Giles Elgood)