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Portugal set to pass budget amid protests; court challenges loom

By Andrei Khalip

LISBON (Reuters) - Portugal is set to approve a 2014 budget on Tuesday, the last under its three-year EU/IMF bailout, but passing the measure is likely to trigger court challenges that could disrupt the country's exit from the bailout program.

As the last pre-vote debate began in parliament, unionists and pensioners converged in front of the building to protest the budget's public-sector wage and pension cuts. Portugal's main union, the 750,000-strong CGTP, has called for nationwide rallies on a "day of indignation, protest and struggle".

"Government out, elections now!" said a banner carried by protesters.

However, the ruling coalition has a comfortable majority, virtually assuring the budget will pass. And the Constitutional Court, which had shot down several austerity measures, late on Monday upheld one contested measure that increases the work week for the public sector.

Portugal's benchmark 10-year bond yield eased to 5.933 percent from Monday's 5.975.

Still, increasing the workweek to 40 hours from 35 hours will have little effect on this and next year's budget, while measures that could be challenged are worth an estimated 1.3 billion euros, or a third of all next year's budget savings.

"It's just one decision and it's too early to make any big conclusions," said Adelino Maltez, a political scientist at Lisbon's Technical University. "But it does show that the court is working as it should and it's not any kind of a 'leftist institution' that some think it is.

"What is certain is that key austerity measures will end up with the court, and I think it can still deliver surprises, both to those on the left and to those on the right," Maltez said.

There is no set time for the budget vote, but it is expected some time in the afternoon.

Nicholas Spiro, managing director at Spiro Sovereign Strategy consultants in London, said the court's rulings "hang over Portugal's reform program like a sword of Damocles".

President Anibal Cavaco Silva had already begun the court process over the weekend, by asking for a review of a planned cut in public-sector pensions that make up a key part of next year's savings. That was a law separate from the budget, and the court now has 25 days to review it.

Opposition parties have said they will challenge more spending cuts once the budget is passed. The threat could force the government to hunt for alternative measures.

The administration has repeatedly said there is no 'plan B' to find alternative revenues. But local media have reported that one possibility is to raise value-added tax again on many products, which could undermine an economy just recovering from its worst downturn since the 1970s.

Portugal's lenders - the European Commission, the International Monetary Fund and the European Central Bank - have also identified challenges by the court as potentially the biggest threat to Lisbon's efforts to exit the bailout in 2014.

The government has repeatedly said its overriding priority is to meet budget goals. It says that is the best way to regain the confidence needed to exit the bailout as planned in June 2014 and return to financing itself in debt markets.

In 2014, the government needs to cut the budget deficit to 4 percent of gross domestic product from 5.5 percent this year. The budget foresees the first year of economic growth next year since 2010.

The government has not ruled out requesting some sort of precautionary loan from creditors after the bailout expires.

(Reporting By Andrei Khalip, editing by Axel Bugge; Editing by Larry King)

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