The forgotten man of the euro: Indebted Portugal to spurn Socialists and elect austerity

Portugal will elect its first post-bail-out government this weekend with polls suggesting the country will reward the ruling coalition that has guided it through four years of austerity.

Prime Minister Pedro Passos Coelho and his conservative alliance are on course for a narrow win in Sunday's vote, beating off the challenge of the ascendant Socialist party (PS), which has led the polls for most of the year.

•

The weekend's election is the first time the electorate has voted since Portugal became the third country in the euro to receive a bail-out from international creditors in 2011.

Should they stick with the incumbent government, the economy is set for more belt-tightening as it pays back its €78bn rescue to creditors in Brussels and the International Monetary Fund.

Defeat will be a severe blow for the centre-left Socialists, led by Antonio Costa, who have campaigned to reverse austerity and revive an economy suffering from a record "brain drain" and which lumbers under the highest debt burden in the eurozone.

But the lesson from Greece's capitulation to creditors in the summer could prove fatal for Mr Costa as voters spurn talk of resisting EU diktats.

Athens' eventual submission was a "clear warning against anti-austerity adventurism" in Europe, says Federico Santi of Eurasia group.

"On the back of improving economic conditions, the PS found itself effectively squeezed between a moderate right-wing government and radical eurosceptic parties that dominate the left" he said.

"As the leader of a rather liberal, fundamentally pro-European centre-left party, Mr Costa’s more abrasive anti-austerity narrative has not paid off."

But the prospect of political instability still looms large over the country. The centre-right ruling alliance is set to fall short of the 40pc threshold required for a majority. Voter turnout is also predicted to be at its lowest since the country became a democratic republic in 1974.

Should Mr Passos Coelho fail to gain an outright win, he will be reliant on the Socialist opposition to pass the spending cuts, privatisation measures, and tax hikes demanded by creditors. Mr Costa however has firmly ruled out any co-operation with the ruling party.

This intransigence could now derail progress in a country hailed as an acquiescent poster-child for austerity by Brussels.

Analysts warn that an unstable minority government will not be up to the task facing the still beleaguered economy. Despite five years under a compliant centre-right government, progress on implementing structural reforms has significantly eased off in recent years.

The IMF is now warning that any new government must redouble its efforts to reduce a 360pc debt overhang or face setting off a new debt crisis.

"A sudden change in market sentiment due to concerns about the direction of economic policies or re-pricing of risk could render Portugal's capacity to repay more vulnerable," said the IMF.