Portugal Socialist leader says best placed to form next government

LISBON (Reuters) - Portugal's Socialist Party is better placed to form a stable government than the centre-right, after two far-left parties dropped their opposition to commitments Portugal has made to respect EU rules on reducing budget deficits, its leader said on Tuesday.

Political uncertainty in Portugal has risen since an inconclusive Oct. 4 election in which the outgoing centre-right government won the most votes but failed to gain a majority in parliament.

Financial markets have slumped in the past two days on the realisation that the Socialists might be in a position to form a left-wing government, overturning expectations that the centre-right would continue in power.

But Socialist 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 centre-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 (NXT.LO)four years," Costa 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.

Costa said negotiations with the two leftist parties were based on the Socialist Party's programme, whereas his talks so far with the outgoing centre-right government had been based on its plans. He will meet acting prime minister Pedro Passos Coelho for the second time later on Tuesday.

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 talks on formation of the next government in the "short-term".

(Reporting By Axel Bugge; Editing by Giles Elgood)

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