Bailout threat overshadows Portuguese elections (News Feature)

By Sinikka Tarvainen Jan 14, 2011, 9:16 GMT

Lisbon/Madrid - Some months ago, Portugal's conservative opposition was still backing the socialist government in its attempts to stabilize the economy and to avoid an international bailout.

Yet as campaigning has gathered pace ahead of the January 23 presidential elections, the political atmosphere has deteriorated, with the opposition increasingly attacking the government over its handling of the economy.

Pressure on Western Europe's poorest country to seek a bailout from the European Union and the International Monetary Fund (IMF) was reduced this week as Portugal passed a key market test with a successful bond auction.

However, Portugal's weak growth and high debt levels still make it look like the next potential victim of the eurozone's debt crisis after Greece and Ireland, exposing it to what many Portuguese would regard as a humiliating financial rescue.

The elections will pit incumbent President Anibal Cavaco Silva, 71, a somewhat uncharismatic economics professor and former prime minister, against Manuel Alegre, 74, a poet with a decades-long parliamentary career.

Cavaco Silva belongs to the main opposition centre-right Social Democratic Party (PSD), while Alegre has the backing of Prime Minister Jose Socrates' Socialists and of the Left Bloc.

Cavaco Silva initially tried to rally the country's political forces behind Socrates' austerity measures - including a 5 per cent cut in public sector salaries - in an attempt to trim the budget deficit from about 7 per cent in 2010 to 4.6 per cent this year.

Yet as market pressure on Portugal increased, the consensus was broken, with the president saying that an eventual IMF intervention would signal the failure of the government's economic policies.

Alegre, on the other hand, links his opponent with an allegedly privileged and reactionary right which is helping market speculators trying to 'force the entry of the IMF into Portugal.'

Many Portuguese have negative memories of the IMF which carried out programmes in the country in 1977 and 1983, slashing social benefits.

If Portugal is finally forced to apply for a bailout, the PSD and the smaller conservative party CDS-PP have called for early elections.

That - analysts say - would increase uncertainty and worsen Portugal's economic woes.

While Portugal's public debt is not alarmingly high in European terms, there is concern especially over the private debt. More than 600,000 Portuguese debtors owe banks more than 150 billion euros (195 billion dollars), according to the central bank.

The economy is expected to slide back into recession this year, after growing 1.3 per cent in 2010. Unemployment is running at about 10 per cent.

The Portuguese presidency is largely a figurehead job, but Cavaco Silva's economic expertise and reputation for efficiency were nevertheless expected to help him take a clear victory in the first election round, as happened in 2006.

If re-elected, the president is pledging to use all his powers 'so that Portugal finds the right direction' in addressing its economic problems.

Allegations that Cavaco Silva pocketed undue capital gains when selling shares of a holding company of the troubled BPN bank in 2003 appear to have done little to dent his credibility.

The battle for the presidency will be a 'difficult' one, Alegre admitted.

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