Portugal government risks collapse before EU summit

LISBON (Reuters) - Portugal's parliament will vote on the government's latest austerity measures on Wednesday, setting the stage for a potential collapse of the minority Socialist administration a day before a European summit.

Prime Minister Jose Socrates has threatened to resign if the opposition fails to approve the measures. The main opposition Social Democrats (PSD) are refusing to back them and have begun to talk about snap elections, complicating the country's efforts to avoid following Greece and Ireland in taking a bailout.

"Tomorrow the resolution on the measures will be voted," lawmaker Heloisa Apolonia of the Green Party said after a meeting of parliamentary leaders on Tuesday. "Tomorrow the plenary will give answers to the country."

The government had hoped to obtain support for its plan before a European Union summit gathers on Thursday to approve a beefed-up euro zone rescue fund.

Francisco Assis, parliament bench leader for the Socialists, said there was still time for a compromise, while failure to pass the measures would throw the country "into an abyss."

Socrates, who announced a deal on Tuesday with employers and some unions to cut redundancy pay in an effort to boost competitiveness, said: "Our country needs agreements, it needs understanding and it needs dialogue." He did not answer journalists' questions about Wednesday's vote.

The latest, disputed measures include further spending cuts to ensure the government can cut the public deficit to 4.6 percent of gross domestic product (GDP) after beating last year's goal of 7.3 percent.

Some analysts have said that markets have begun to price in a change of government and see a bailout as a near certainty.

"It is inevitable that the Portuguese people have the final say," PSD leader Pedro Passos Coelho said late on Monday, suggesting a broad coalition after elections to solve the country's problems.

Still, economic policy may not change much as the opposition is also broadly committed to the austerity path.

Portugal's benchmark 10-year bond yield rose to 7.69 percent from Monday's 7.53 percent, taking the premium investors demand over German Bunds to 443 basis points from 430 bps.

"The idea and concept that the austerity may be thrown out and the government may fall is undoubtedly not what bond-holders want to hear," said Peter Chatwell, debt strategist at Credit Agricole in London.

Portugal's borrowing costs have soared during the year-long sovereign debt crisis. The 10-year bond yield hit euro lifetime highs of over 7.8 percent earlier this month, which ministers said was an unsustainable financing level.

MESSY COLLAPSE?

Socrates' repeated threat to resign means the two-term prime minister's future now hangs on Wednesday's vote.

He threatened to quit in similar circumstances last year but the Social Democrats turned up to offer backing each time, including over the 2011 budget.

This time the PSD decided they have had enough, hoping instead that their lead in opinion polls will translate into them taking power whenever a snap election is held.

"Basically, we now have only two hypotheses -- a controlled fall of the government and an uncontrolled collapse, but with the PSD openly saying it wants an election and the president silent everything points to the second option," said political analyst Viriato Soromenho Marques at the University of Lisbon.

President Anibal Cavaco Silva is seen by some analysts as a possible mediator in the crisis but has remained silent so far after meeting Passos Coelho and Socrates last week.

If the government resigns it is up the president to set a snap election and decide on a caretaker administration with limited powers until a new government is formed. The constitution stipulates that the country can hold a snap election at the earliest 55 days after the president calls them.

The Socialists have 97 seats in the 230-seat parliament and all other parties have so far said they will vote against the measures, which need 116 votes to be approved.

Passos Coelho said his party did not rule out following Greece and Ireland in requesting an international bailout if it came to power, if such a request were inevitable for Portugal to recover from its difficult economic situation.

The government's latest economic plan shows it now shares economists' expectations of a recession in 2011. The document predicted a contraction of 0.9 percent in GDP this year compared with the previous estimate of 0.2 percent growth.

(Additional reporting by Andrei Khalip; Writing by Axel Bugge, editing by Mike Peacock/Ruth Pitchford)