LONDON, March 7 (Reuters) - Portugal holds a snap

election on Sunday, its second in two years, with polls pointing

to a hung parliament and strong showing for the far-right Chega.

Markets have taken political uncertainty, sparked by the

November resignation of centre-left Socialist Prime Minister

Antonio Costa, in their stride.

"Given that you have centrist parties who are likely to be

in government, you'll have a certain degree of continuity," said

Antonio Barroso, managing director at political consultant

Teneo.

Costa's Socialist Party, now led by Pedro Nuno Santos, looks

set to lose its majority and trails the centre-right Democratic

Alliance, led by Luis Montenegro, in the polls.

The populist Chega is expected to more than double its vote

share, potentially becoming kingmaker.

Here are five key questions for markets.

1/ HOW SERIOUS IS THE POLITICAL INSTABILITY?

It is a concern, this will be Portugal's third election

since 2019.

Neither the centre-left nor the centre-right is expected to

clinch an outright majority, so a post-election stalemate is

likely, potentially leading to another election.

"More than specific policies, the strength of the mandate

will be key," said Banco de Investimento Global (BiG) portfolio

manager Ricardo Seabra.

"If this renders greater future fiscal stability and a

reduction in red tape, Portugal will remain attractive for

foreign investors."

2/ WHAT DOES THE ELECTION MEAN FOR THE ECONOMIC OUTLOOK?

Not much damage, investors hope.

Portugal's recovery from its 2011 bailout has been a euro

area success story. Economic growth recovered and the public

debt ratio fell to 98.7% of gross domesticu product in 2023, its

first time below 100% since 2009.

Finance Minister Fernando Medina says balancing the budget

and reducing debt must continue, whichever government emerges

post-election.

"The fall in Portugal's government debt is quite

incredible," said Capital Economics assistant economist Bradley

Saunders.

"Both major parties are quite fiscally conservative and so,

I'd expect to see a pretty similar path of debt reduction

regardless of which major party wins."

3/ IS THE RALLY IN PORTUGUESE BONDS JUSTIFIED?

Yes. Portugal's debt load, while high, is coming down and

ECB rate cuts are coming.

Ratings agency S&P Global just raised Portugal's rating to

"A-" from "BBB+", citing an improved debt outlook and saying a

change in government should not alter that trajectory.

At around 3%, Portugal's long-term borrowing costs

, are lower than in Spain, Italy and Greece. The gap

over top-rated Germany, at 65 basis points is near

its tightest in two years.

"Parliament has already approved the 2024 budget, and we

think risks to policy continuity are limited due to a consensus

on fiscal prudence," S&P said in its report.

4/ WHAT ABOUT PORTUGAL'S COMMITMENT TO THE EURO?

That has not been an issue in this election, leaving the

euro undisturbed.

The euro-scepticism evident in many European elections in

the 2010s and early 2020s has subsided in Portugal, partly

thanks to Portugal being one of the main beneficiaries of the

EU's 800 billion euro post-COVID recovery fund.

"Portugal has already received some disbursements because

it's met its targets very quickly," said Capital Economics's

Saunders.

"I'd be very surprised if any leader would bite the hand

that feeds it at this moment in time."

5/ SHOULD EQUITY INVESTORS WORRY ABOUT A WINDFALL TAX?

A little perhaps.

Post-COVID, Portugal has introduced some of the broadest

windfall taxes in Europe, targeting energy and food companies.

Markets are on edge for similar policies.

A levy on bank profits has been mooted by Chega but analysts

reckon the chance of this happening is slim, with Chega unlikely

to be a part of the new government.

"Simply put, it's just one of the many populist pre-election

soundbites they have generated," said BiG's Seabra.

Any signs of a tax on banks could however hurt Portugal's

stock market, which has performed relatively poorly in

2024. That is partly due to an 18% decline in the index's

largest component, utility company EDP.

($1 = 0.9177 euros)