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Europe rocked by Greece, Portugal debt fears

25. March 2010. | 06:54

Source: EUbusiness.com

The eurozone was shaken on Wednesday by fears the Greek finance crisis could be spreading after Portugal was hit by a credit downgrade and Spain faced mounting criticism of its budget plans.

The eurozone was shaken on Wednesday by fears the Greek finance crisis could be spreading after Portugal was hit by a credit downgrade and Spain faced mounting criticism of its budget plans.

EU leaders meanwhile struggled for consensus on what to do about Greece's debt debacle ahead of a critical European Union summit starting Thursday, with officials foreseeing an unprecedented intervention by the IMF in the euro area.

The Fitch ratings agency lowered Portugal's long-term debt rating by one notch and gave it a negative outlook, warning that a severe strain on public finances had reduced the eurozone country's creditworthiness.

"Today's downgrade of Portuguese government debt by the rating agency Fitch is another reminder that the eurozone's fiscal problems are not limited to Greece," said Jennifer McKeown from Capital Economics research group in London.

Germany's Deutsche Bank warned of a "euro sovereign debt crisis."

Spain, Europe's fifth-biggest economy, also added to mounting concern after the leader of the conservative Popular Party, Mariano Rajoy, questioned the credibility of government plans to reduce the country's huge deficit.

European officials have repeatedly assured in recent weeks that there is no risk of "contagion" from the Greek crisis, but financial markets on Wednesday appeared to tell a different story after the shock of Portugal's downgrade.

The value of the euro plummeted to below 1.34 dollars for the first time in more than 10 months even as European states edged toward a possible financial rescue package to prevent Greece from defaulting.

What appeared to be emerging was a joint solution, combining the engagement of both the European Union and the International Monetary Fund in a bid to assure financial markets that Greece can access funds if it needs them.

"The involvement of the IMF is a negative on the European solidarity front... because it challenges the idea that the euro area can sort its problems out on its own," analysts at British bank RBS said in a statement.

But they added that the expected approval of the rescue package "will be positive for Greece and the periphery in general."

The European single currency meanwhile sank to 1.3354 dollars in late trading in London, down sharply from 1.3496 dollars in New York late Tuesday.

The Stoxx 50 index of top eurozone shares closed 0.22 percent lower.

Deutsche Bank said in its World Outlook report on Wednesday that weak growth in the eurozone could make debt troubles worse.

"The problems may differ across peripheral economies, but in general, weaker than expected growth could frustrate consolidation efforts," the report said.

"The market's faith will be tested again and this will keep EU authorities under pressure," it added.

Apart from Greece and Portugal, the three countries seen by analysts as most at risk of hitting debt trouble are Ireland, Italy and Spain.

In the background are deeper worries about the financial health of some bigger European economies like Britain, France and Germany.

Spanish Prime Minister Jose Luis Rodriguez Zapatero vowed on Wednesday to enforce "maximum austerity" after the opposition voiced scepticism that his government can cut the public deficit down to eurozone limits by 2013.

"The government is firmly committed to reducing the public deficit and following maximum austerity during this stage," Zapatero told parliament.

He said his Socialist government will announce in the first two weeks of April a belt-tightening programme for state-owned companies.

The flipside of the eurozone's troubles has been a boost to exporters because of a fall in the euro, a factor in the sharp rise in private sector business activity reported by research group Markit on Wednesday.

Howard Archer, chief European economist at US-based analysis group IHS Global Insight, said that the healthier business data "significantly boosts hopes that the eurozone recovery is regaining momentum."

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