ANALYSIS: Conservative victory may toughen bailout for Portugal

By Sinikka Tarvainen and Emilio Rappold Jun 6, 2011, 9:05 GMT

Lisbon - Pedro Passos Coelho, Portugal's likely new prime minister, is known as a staunch free-market liberal who says his country needs deep reforms to 'mature into a highly developed society.'

The 46-year-old conservative winner of Sunday's parliamentary elections will preside over a new period of economic hardship for the Portuguese, who have already been tightening their belts under the austerity policies of outgoing Socialist caretaker Prime Minister Jose Socrates.

Starting in July, the new government will implement the tough bailout conditions set by the European Union and the International Monetary Fund (IMF), which gave 78 billion euros (112 billion dollars) in loans to avert Portugal's financial collapse.

Passos Coelho is expected to follow the creditors' instructions to the letter, and possibly to go even beyond after forming a strong coalition government allowing him to weather growing protests against the spread of poverty.

Passos Coelho's Social Democratic Party (PSD) took nearly 40 per cent of the vote in Sunday's poll to oust Socrates, who had governed Portugal since 2005.

Passos Coelho's victory reflected a desire for 'strong change' among the Portuguese, on whose discontent the conservatives had capitalized, political analyst Andre Azevedo Alves said.

About 60 per cent of the 9.6 million eligible voters turned out, slightly lower than in 2009 elections.

The lower participation was seen as reflecting a disillusion with politicians in Portugal, where politics had become 'a petty game of scheming,' as former president Mario Soares put it following an election campaign filled with mudslinging.

Many Portuguese felt it hardly mattered which party was in power, because economic policy will be largely dictated by the EU and IMF.

Portugal has long suffered from sluggish growth, an excessive reliance on low-technology sectors such as textiles or tourism, low competitiveness and high debt.

Socrates tried to reduce the budget deficit, at 9.1-per-cent of Portugal's annual gross domestic product, but resigned over Parliament's rejection of his fourth austerity package, prompting President Anibal Cavaco Silva to call early elections.

Portugal's borrowing costs then soared to unsustainable levels, and Lisbon was forced to accept the EU-led bailout it had desperately tried to avoid.

The measures demanded by the EU and IMF include spending cuts in health, education and pensions, as well as tax hikes, trimming the administration and making firing workers cheaper.

Such measures are expected to increase poverty in what is already Western Europe's poorest country.

About one-fifth of the Portuguese already live on less than 360 euros a month, according to official figures. Unemployment has already climbed to a record 12.5 per cent.

'You cannot ask families to make any more sacrifices,' said Eugenio Fonseca, head of the Portuguese branch of the Catholic organization Caritas whose number of aid applicants has increased by 40 per cent this year.

'The situation is dramatic, with more and more people asking the church to help them to pay for water, bread or electricity,' Evora Archbishop Jose Alves said.

The new austerity measures are expected to undermine consumption and contribute to the economy contracting 2 per cent in 2011 and in 2012.

Portugal is seeing constant strikes and other protests against the worsening living conditions, which could also revive political bickering over fiscal policy.

Passos Coelho, however, will be in a better position to weather the storm than Socrates, who headed a minority government.

The PSD leader was expected to seek a coalition with the conservative-nationalist CDS-PP, which would give him an absolute majority in Parliament.