Portugal's new govt faces bailout pressures

Associated Press
Pedro Passos Coelho, leader of the center-right Social Democratic Party, PSD, gestures to supporters from the top of an open deck bus in Lisbon after his party won Portugal's general elections Sunday, June 5 2011. (AP Photo/Francisco Seco)
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LISBON, Portugal (AP) — Portugal's center-right Social Democrats had little time to savor their return to power Monday, launching immediately into getting a ruinous debt burden under control despite a shrinking economy.

Social Democrat leader Pedro Passos Coelho scored an emphatic win at the ballot box Sunday, with his party collecting 39 percent of the vote to 28 percent for the second-placed Socialist Party, which had governed for the past six years.

Passos Coelho takes over as prime minister later this month with Portugal in the middle of a financial storm. His new government inherits a record jobless rate of 12.6 percent and an expected economic contraction of 4 percent over the next two years.

The clock is also ticking on a long list of painful austerity measures that have to be adopted swiftly in return for a euro78 billion ($114 billion) international bailout program agreed to under the former Socialist government.

Any delays or hesitation could jeopardize the agreement that saved Portugal from bankruptcy, and complicate European efforts to staunch the continent's debt troubles.

"Passos Coelho is going to have the shortest honeymoon period ever," the Jornal de Negocios editor wrote Monday.

The strong win offered encouragement, however, for Passos Coelho's ambition to set Portugal on the road to recovery. Despite upcoming further tax hikes, public sector pay freezes, and pension and welfare cuts, almost 80 percent of voters supported one of the three parties that have backed the bailout conditions.

The yield on Portugal's 10-year bonds stood at 9.71 percent Monday — slightly down on the day but still at an unsustainable level as markets awaited news of the new government's progress.

Passos Coelho said he would consult with the smaller, conservative Popular Party — which won 12 percent of the vote — about forming a coalition government. Such a deal would ensure him an absolute majority in parliament, which is crucial for the approval of debt-reduction policies and broad social and economic reforms.

A lot is riding on Passos Coelho's negotiating skills. The affable 46-year-old is untested at such a high level, never having held a government post. After graduating in economics from a Lisbon university in 2001 he went into business, becoming an executive at companies in the energy and environmental sectors.

"I hope he will be man enough to govern the country," Lisbon resident Francisca Monteiro, 48, told Associated Press Television News.

Passos Coelho said he was selling no illusions.

"A lot of difficult measures lie ahead," he said Monday en route to a party meeting. "The Portuguese will need a lot of forbearance in coming years."

The new government will have to move quickly on spending cuts and economic reforms before its first report in July to inspectors from Portugal's European partners and the International Monetary Fund, which put up the money for the bailout.

An immediate concern is improving the country's notoriously slow bureaucratic procedures, identified as one of the obstacles to Portugal's development, and which will prevent the government from formally beginning its four-year term for at least two weeks. The outgoing government remains as a caretaker administration until then.

Trade unions have promised strikes over scrapping entitlements such as job security.

Portugal will need substantial economic changes to trigger the growth needed to pay its massive debts. Low productivity, weak competitiveness and low levels of education have constrained the economy to average annual growth below 1 percent over the past decade.

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