Portugal left set to oust centre-right, roll back austerity

LISBON (Reuters) - Leftwing parties looked set to oust Portugal's minority centre-right government on Tuesday in a parliamentary vote, part of a drive to set up their own Socialist-led administration they hope will put an end to years of harsh austerity.

The prospect of a government backed by the Communists and other far-left parties has rattled investors, pounded markets on Tuesday and threatens to derail a fragile economic recovery in Portugal, which exited an international bailout only last year.

Finance Minister Maria Luis Albuquerque warned parliament that investor confidence was already waning while failure to cut the budget deficit in line with Lisbon's European commitments could provoke a new debt crisis and bailout.

"Have no doubts, if Portugal is forced to request another assistance programme, the sacrifices we'd all have to go through would be tougher than before," she said in a parliamentary debate on the centre-right government's programme.

"We don't need to imagine the consequences, it's enough to look at the recent experience of Greece and the cost of their attempt to end austerity ... More recession, more poverty, more jobless and more dependence on European and IMF lenders."

The Socialists insist they would respect European budget rules as they plan to return incomes to households which should boost the economy, but many economists have questioned the plan.

Lisbon's stock market shed a further two percent after tumbling more than 4 percent on Monday. Bond yields tightened slightly after a 20-point slide the previous day.

Prime Minister Pedro Passos Coelho's centre-right coalition won most votes in an Oct. 4 parliamentary election and, in keeping with political convention, he was sworn back into office last week by the president.

But his coalition was outvoted by the combined strength of three left-of-centre parties - the main opposition Socialists, the Communists and the Left Bloc.

In an unexpected development not seen in four decades of Portuguese democracy, the three leftwing parties have agreed to cooperate to reject the government's new programme in a vote due on Tuesday afternoon. That would force its resignation.

"The left will remain united and reject Passos Coelho's programme, forcing the prime minister to resign," said Antonio Barroso, senior vice president at Teneo Intelligence, a political risk consultancy, in a report.

In what could then be a lengthy process, President Anibal Cavaco Silva could ask Passos Coelho's government to remain in a caretaker capacity pending a new election or invite Socialist leader Antonio Costa to form a government.

"MARKET-NEGATIVE"

If Costa leads a government with the Communists and Left Bloc, it will be Portugal's first to include far left parties since Portugal returned to democracy in 1974 after decades of right-wing dictatorship, Barroso said.

"The probable consequences of this experiment are far from clear-cut, but they are likely to be mostly market-negative," he said. The Socialists could roll back reforms and spending cuts introduced during Portugal's debt crisis and bailout even though they have promised to stick to European budget goals.

Portugal's largest trade union, the CGTP, which is linked to the Communists, has called a rally in front of parliament for Tuesday afternoon. A counter-rally in support of the government is planned at the same venue a little earlier.

(Editing by Gareth Jones)