Portugal risks alliance rupture if Brussels demands more austerity: Fitch

Portugal risks a rupture among its left-wing government alliance if Brussels demands additional measures for the country's 2016 state budget, rating agency Fitch warned Tuesday.

"There is a risk that the European Commission demands further deficit-reduction measures after the stability program is presented in the spring, in particular as budget targets were missed in 2015," their report read.

"Although the government has agreed to put in place additional measures if needed, including enlarging means-test conditions for social benefits and conducting a wider expenditure review, this could likely prove a breaking point for the coalition," Fitch added.

The rating agency says that while the Socialist Party has shown it is ready to abide by EU fiscal rules, political uncertainty could harm confidence and growth and therefore make fiscal consolidation and debt reduction much harder.

Fitch earlier this month affirmed Portugal's rating at BB positive but changed its rating outlook from stable to positive. It has previously pointed out that the country might have to implement further austerity measures and that this could spark political tension.

The state budget predicts the budget deficit will be cut to 2.2 percent of GDP after reaching 4.3 percent of GDP last year.

Fitch said in the statement on Tuesday that this target would be difficult to reach, pointing out that the budget deficit figure was based on "optimistic assumptions" on both economic growth and price developments.

"There is some uncertainty as to how the new government will finance the gap stemming from the policy reversals announced for this year, as some of the proposed revenue measures could prove hard to implement in full," the agency adds, pointing out that Fitch forecasts a deficit of 2.8 percent for 2016.

The country's state budget for 2016, implemented by the Socialist party backed by the Communist Party and Green Party, aims to roll back austerity by restoring public workers' pay while raising indirect taxes on products like alcohol and cigarettes, among other measures.

The left-wing alliance defeated the center-right government led by Pedro Passos Coelho in November last year, with voters tired of several years of harsh austerity implemented under the 78 billion euros (88.09 billion U.S. dollars) bailout program the country signed with its international lenders in 2011. Endit