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Portugal votes for new govt, fears more austerity

By Barry Hatton

Associated Press

Published: Sunday, June 5 2011 6:30 a.m. MDT

Pedro Passos Coelho, leader of the center-right Social Democratic Party, PSD, casts his ballot in Portugal's general elections Sunday, June 5 2011, in Amadora, outside Lisbon. Opinion polls indicated Friday that the main opposition PSD will unseat the ruling Socialist Party in the election held against the backdrop of a euro 78 billion bailout.

Armando Franca, Associated Press

LISBON, Portugal — Portuguese voters were choosing a new government Sunday, one that will be forced to impose grinding austerity measures as part of a €78 billion ($114 billion) bailout deal expected to pitch the country into a two-year recession.

Polls indicate the opposition Social Democratic Party will unseat the ruling Socialists, but whichever party wins will face the enormous task of trying to nurse the debt-wracked country back to financial health.

The winner in Portugal will inherit a record jobless rate of 12.6 percent and an expected economic contraction of 4 percent over the next two years in what is already one of Europe's poorest countries.

Necessary welfare and pay cuts, tax hikes and promises of strikes from trade unions will also present tough challenges for the new administration as it tries to engineer the growth Portugal will need to cut itself free of its ruinous debt load.

Filipa Pinto, a 48-year-old homemaker voting in Lisbon, said the election campaign failed to address Portugal's core problem — that the country hasn't made its economy leaner and more competitive.

"The politicians don't really want to change much. We're only going to see a few changes because we're being forced to make them from the outside," she said.

Portugal is locked into debt-reduction targets established as part of the bailout deal, limiting its room for maneuver. But President Anibal Cavaco Silva said the new government will have "much to decide and do" and appealed against abstention among the country's 9.6 million registered voters.

Any sign that Portugal is not abiding by the terms of its bailout agreement with its eurozone partners and the International Monetary Fund will likely aggravate Europe's debt crisis. There are already signs of bailout fatigue among the continent's wealthier nations, and Greece's financial future remains uncertain as its original bailout appears too small.

Keeping the political peace won't be easy.

The election — the country's second in two years — comes after months of political squabbles over how best to reduce the debt burden. Opposition parties refused to accept the Socialist government's austerity plans, prompting the administration to resign and worsening Portugal's financial plight.

The center-right Social Democrats are seeking a strong mandate to enact unpopular fiscal measures and introduce longer-term economic reforms such as making it easier to hire and fire workers — a proposal parties on the left have balked at.

Social Democrat leader Pedro Passos Coelho, possibly the country's next prime minister, could potentially invite the smaller, conservative Popular Party to form a coalition government if the Social Democrats fall short of a strong majority in the 230-seat Parliament.

All three main parties gave their blessing to the bailout deal, though they differ over how to meet the debt targets and the possible privatization of public services.

The Portuguese Communist Party and its like-minded rival the Left Bloc, which are each expected to get less than 10 percent of the vote, have fought against bailout demands but could potentially support the Socialists in Parliament.

Luisa Diogo, a 56-year-old high-school teacher, said the country's near future is already mapped out and she felt "sad and powerless" while facing years of hardship.

"Europe is changing. All those postwar policies designed to give dignity to the old, the infirm and the unemployed are being taken away," she said after voting in Lisbon.

The Bank of Portugal has predicted that economic hardship will be "particularly severe" in coming years, with an "unprecedented" drop in family income.

Portugal has lived beyond its means during the past decade despite average annual growth below 1 percent. It took advantage of cheap loans as a member of the 17-nation eurozone to build up debt, which financed its western European lifestyle of welfare entitlements and job security.

Portugal needs to increase its exports amid feeble domestic demand. As a member of the eurozone it can't devalue its currency, but it can reduce pay and take other steps to cut costs.

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