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Portugal coalition partners pledge cohesion before budget vote

Monday, 29 Oct 2012 | 6:48 PM ET

* Junior partner was critical of tax hikes

* Budget may still face hurdles in courts

LISBON, Oct 29 (Reuters) - Portugal's ruling coalition parties said on Monday they will not run against each other in next year's local elections, sending a signal of unity before Wednesday's vote on a tax-heavy draft 2013 budget aimed at meeting the country's bailout goals.

The junior partner in the coalition, the rightist CDS, is traditionally against tax hikes which triggered speculation this month that the government may not have enough votes to approve the budget as it relies on the CDS for a majority in parliament.

But the CDS leader has since sworn obedience saying the country has to avoid political crises and needs to stick to the terms of the EU/IMF bailout.

The CDS agreement with the ruling Social Democrats on coalitions to jointly choose a list of candidates in local elections, to take place a year from now, is meant to confirm that their partnership remains strong.

CDS deputy president Nuno Melo told reporters the deal was ``very important for the next electoral battle ... what has been a success at the local level before will continue,'' he said.

Asked about the importance of the agreement during the budget discussions, Social Democrat Jorge Moreira da Silva said: ``It is fundamental that we focus on meeting our objectives in terms of budget consolidation and fixing structural problems of the economy.''

The centre-right government's draft budget imposes the biggest tax rises in the country's democratic history.

Although its approval in parliament is practically guaranteed in the first reading on Wednesday and then in the final reading on Nov. 27, the budget has upset many Portuguese and could still be challenged in the courts.

Such a challenge would create a big risk for government efforts to meet strict budget goals under the 78-billion euro bailout, as the constitutional court already once this year overruled a government measure to cut spending.

The IMF last week warned of growing risks to Portugal's adjustment programme due to lower tax revenues, growing resistance to austerity and the likelihood that it will remain in recession next year.

Many economists fear the country, already in its worst recession since the 1970s, may descend into a spiral of decline due to the doses of austerity needed to reach its fiscal goals.

Portuguese benchmark 10-year bond yields have risen from mid-October lows of around 7.5 percent to around 8.1 percent after IMF warnings, but are still lower than about 9 percent where they started the month and way below January highs of more than 17 percent. The country hopes to regain market bond access next year.

(Reporting by Andrei Khalip and Daniel Alvarenga; Editing by Jon Hemming)