By Juana Casas
TEGUCIGALPA (Reuters) - Politically isolated Honduras braced on Saturday for months of austerity under the weight of economic sanctions imposed after a June coup and ousted President Manuel Zelaya vowed actions to support his reinstatement.
With the textiles and coffee exporting economy seen contracting this year amid a global economic crisis, the interim government that replaced Zelaya estimates it already has been denied about $200 million (123 million pound) in suspended credits.
The United States has cut $16.5 million in military assistance and warned a further $180 million in other aid is at risk; and any repeat of a brief boycott by neighbouring trade partners would choke one of Latin America's poorest countries.
"We have to think in terms of austerity and we want to ask the people to do the same," interim president Roberto Micheletti said on Friday. He had asked his finance minister to find ways to cut state spending to ride out the coming months.
The interim government, installed by Congress after widely unpopular Zelaya was booted out of the country in his pyjamas last month by soldiers, has resisted international pressure and says Zelaya's reinstatement is not negotiable.
It accuses Zelaya, who ran afoul of his political base and ruling elites in the conservative country by allying himself with Venezuela's firebrand leftist President Hugo Chavez, of contravening the constitution and seeking to illegally extend his rule.
LITTLE CLEAR PROGRESS
That has left little wriggle room for talks brokered by Costa Rica aimed at defusing one of the worst crises in Central America since the Cold War. The talks have resulted in little apparent progress, aside from an agreement to keep talking.
"Here we are, with irreconcilable positions, but I believe that these positions will ease as we advance in the dialogue," Costa Rican President Oscar Arias, who is acting as mediator in the Honduras crisis talks, told CNN Espanol in an interview.
Arias, who won the 1987 Nobel Peace Prize for his work in ending Central American conflicts, said talks held so far between the rival delegations had been frank but respectful.
Zelaya's term was due to end in January and local commentators suspect the interim government is seeking to buy time to make his reinstatement obsolete.
The United States, facing a major test of President Barack Obama's promise of a fresh start in relations with Latin America, has joined many regional governments in strongly condemning Zelaya's ouster but has urged him against trying to return unilaterally to avoid stoking tensions and violence.
At least one pro-Zelaya protester was killed in clashes at Tegucigalpa's airport last Sunday when Honduran troops blocked an attempt by Zelaya to return in a plane provided by Chavez.
Around 1,000 protesters marched to the airport on Saturday for a ceremony to remember the clashes and victims, complete with music and theatre and attended by Zelaya's wife, Xiomara.
Zelaya flew from the Dominican Republic to Washington on Saturday, where he met senior State Department officials who a White House official said reaffirmed U.S. support for restoring democratic order in Honduras and for Arias' mediation efforts.
Before flying out, Zelaya said the talks in Costa Rica had opened a "window" for a deal, and vowed unspecified actions to back his case for restoration both at home in Honduras and in the international arena.
INSURRECTION 'A RIGHT'
"The United States cannot live with a de facto, unconstitutional, coup regime in the Americas," Zelaya told CNN Espanol in Santo Domingo before boarding for Washington.
"The people have the right to insurrection. It's a constitutional right," he added, saying Honduras' constitution stipulated that no citizen had to obey a "usurper regime."
Former Cuban President Fidel Castro, whose country backs Zelaya, wrote in a column late on Friday he feared a wave of copy-cat coups in Latin America unless Zelaya is reinstated.
Vowing not to back down, interim President Roberto Micheletti is expecting a tough five or six months.
So are ordinary Hondurans.
Boiling corn over a wood fire to make tortillas to sell in her poor neighbourhood of Santa Cecilia in the gang-plagued hills on the outskirts of Tegucigalpa, 52-year-old Fidelina Zepeda says her costs have risen 30 percent since the ouster.
"Everything's all messed up", said Zepeda, who makes just 80 lempiras (2.50 pound) a day selling the pancakes and lives with her extended family of 9 adults and five children in a modest brick and tin sheet dwelling. "There's a lot of fear."
"The men go out to steal and the women stay at home waiting for their husbands to come back," she added. Her daughter-in-law, Claudia Sanchez, said work has become scarce since Zelaya raised the minimum wage, angering businesses.
Business leaders who back the interim government have agreed to freeze prices of basic goods to help stem inflation, which exceeded 11 percent last year.
Interim Finance Minister Gabriela Nunez said this week she expects the economy to shrink by up to 2 percent this year after growing by 4 percent in 2008 -- a far cry from forecasts for 2 percent to 3 percent growth predicted earlier this year.
"We have to guarantee food security given this critical situation but if there are job losses and investment projects are stalled (due to cuts in multilateral aid), that would be really serious," Nunez said.
Economic sanctions would hammer a land where 70 percent of the more than 7 million population is poor.
Central American governments imposed a 48-hour commercial blockade shortly after the coup which cost the region some $61 million in trade, according to Honduras' business council.
However, any repeat of such a move could equally hit countries which imposed the sanction, council officials said.
(Additional reporting by Daniel Trotta and Enrique Pretel in Tegucigalpa, Manuel Jimenez in Santo Domingo, Jeff Franks in Havana, Pascal Fletcher in Mexico City and Doug Palmer in Washington; Writing by Simon Gardner; editing by Todd Eastham)
