Portuguese stocks plunged and bond yields widened Feb. 4 as worries over budget deficits and sovereign debt spread to another Southern Europe country
There was no let-up in the turmoil caused by European budget deficits on Thursday (4 February), with investors turning their attention to the weak state of Portugal's public finances.
The country's stock market plunged nearly five percent, the biggest daily fall since November 2008, and bonds yields rose, even as opposition parties proposed to increase public spending on the Atlantic islands of Madeira and the Azores.
Portuguese finance minister Fernando Teixeira dos Santos from the centre-left Socialist party implored members of parliament not to follow through with the opposition regional finance bill, warning it would only add to investor doubts.
In a televised address, he said it would send the "the worst possible message" to financial markets, at a time when Europe's peripheral states are under intense scrutiny.
Portugal, Ireland, Italy, Greece and Spain – occasionally referred to collectively has the "PIIGS" countries – have drawn extensive heat from markets since the financial crisis began, although a series of hairshirt budgets in Ireland has started to provide some let-up from investors.
Greek plans to rein in its budget deficit won European Commission support this week, with Mr Teixeira dos Santos promising that Portuguese plans, expected later this month, would be "no less ambitious."
Portugal had taken over from Greece as the main victim of the "animal spirits" of financial markets, said the finance minister, adding that the concerns were not justified.
European Central Bank president Jean-Claude Trichet also sought to soothe fears over the eurozone on Thursday, saying the bloc's average deficit of around six percent compared "very flatteringly" to other countries such as the US where is close to 10 percent.
For his part, Spanish Prime Minister Jose Luis Rodriguez Zapatero attempted to convince investors that his Socialist government had a solid grip on the country's budgetary problems.
Speaking at a closed-door gathering at the US Chamber of Commerce in Washington on Thursday, he stressed the point that Spain's deficit was a consequence of stimulus spending that had now peaked, and pointed to fresh austerity measures outlined last week.
Despite the panoply of remarks intended to allay market fears, doubts remain over the ability of European governments to push through spending cuts and tax increases without causing social unrest.
Spanish unions on Thursday threatened massive protests in response to the government's plans to slash spending in a bid to save €50 billion by 2013. The country's employees are also concerned by the recent proposal from Madrid to increase the age of retirement by two years to 67.
The backlash in Greece against government measures also escalated on Thursday, with the country's customs and tax officials launching a 48-hour strike that shut down ports and border crossing points.
Greece's largest union, the General Confederation of Greek Workers, which represents private sector employees, also announced plans to hold a one-day strike on 24 February as a sign of solidarity with public sector workers, set to bear the brunt of Athens' tough new measures.