September 4, 2015 / 2:28 PM / in 3 years

Portugal political risk rises with election race in dead heat

LISBON (Reuters) - Uncertainty surrounding Portugal’s general election rose on Friday as the first poll after the summer break showed the tightest race to date with no clear winner, raising the chances of political logjam after the Oct. 4 vote.

The poll showed the difference between the ruling centre-right coalition and the opposition Socialists at just one percentage point, indicating no one side would be able to create a majority government.

“It is increasingly likely that the election result won’t produce a stable government and that naturally raises Portugal’s political risk, which has in no way been discounted in Portuguese asset prices,” said Filipe Garcia, head of the Informacao de Mercados Financeiros economic consultancy.

A main risk is that a slim win for any of the sides would lead to a minority government which cannot govern effectively.

President Anibal Cavaco Silva, whose constitutional powers means he approves the formation of the government, has warned that Portugal cannot afford political instability as it seeks to safeguard an economic recovery after a debt crisis.

The election will pit Prime Minister Pedro Passos Coelho against Socialist leader Antonio Costa, the former mayor of Lisbon. No far-left or far-right parties have emerged in Portugal due to its crisis as has happened in Greece.

Passos Coelho hopes his steady hand in guiding Portugal out of the debt crisis and bailout will convince voters to stick with him despite the austerity measures of the past four years. The economy’s recovery, which started last year when Portugal exited the bailout, has gathered steam this year.

Passos Coelho’s coalition gained 0.2 percentage points to 35 percent while the Socialists slipped 0.3 percentage points to 36 percent in the poll by pollsters Eurosondagem published on Friday in weekly Expresso.

The poll showed a continued gradual decline for the Socialists and confirmed a rising trend for the coalition. But with just four weeks to go, the prospect of any candidate taking off was uncertain.

“The key message is whether one of the sides will get a last minute boost or not,” said Antonio Barroso, senior vice president at the Teneo Intelligence consultancy in London.

“Can the coalition recover enough to pull off a Cameron?” he added, referring to Britih Prime Minister David Cameron’s surprise win at general elections last year.

Costa has said he would change the government’s austerity policies and give families more disposable income, although he would still respect Portugal’s obligations to cut its budget deficit.

Garcia said Portugal’s country risk hasn’t been evaluated very closely as the Socialists and coalition “agree on the most important things; the budget goals and membership of the European Union and euro.”

“If there is political instability, the whole decision framework of economic agents would be hurt,” he said.

With the poll results, the prospects of a minority government are rising.

The previous minority Socialist government was forced to seek the bailout in 2011 during Europe’s debt crisis when it was unable to pass economic policies in parliament. It subsequently collapsed.

Additional reporting by Sergio Goncalves

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