TURMOIL SWEPT through European markets as Portugal and Spain came under mounting pressure to resolve their fiscal problems, adding to acute anxiety over the crisis in the Greek public finances.
Amid rising concern about the risk of sovereign default, the euro fell to its lowest level against the dollar since May 2009, and the cost of insuring Greek, Portuguese and Spanish debt against default reached new highs.
Greece remains by far the most vulnerable of the 16 euro zone countries, but attention has turned to Portugal and Spain as their governments face big political challenges to calm their public finances.
EU leaders are likely to discuss the pressures on the currency when they gather for a special summit in Brussels next Thursday to develop a new economic plan for the union.
Their meeting comes against the backdrop of threats from the European Commission to impose budget measures on Greece if its austerity plan misfires.
Even though the European authorities insist there is no bailout plan for Greece, the fear remains that the country may require exceptional funding if it is unable to raise the €50 billion it needs to keep the state afloat.
While markets shrugged off soothing words two days ago from European Central Bank (ECB) president Jean-Claude Trichet, ECB governing council member Ewald Nowotny reiterated the bank’s confident stance yesterday by calling talk of a euro zone break-up “absurd”.
“The market is closely watching each country’s ability to pay its debts,” said Erkki Liikanen, another ECB council member. If faith is lost, he said, interest rates on sovereign date will go up significantly.
The euro fell below $1.36 and dropped against currencies such as the Swiss franc, forcing the Swiss National Bank (SNB) to take the unusual step of intervening in the market.
Greek stocks fell 3.7 per cent and Portuguese and Spanish each lost more than 1 per cent after sharp falls on Thursday.
Looming industrial action by Greek workers, however, means the Greek government will soon face a critical test of its resolve. The biggest public sector union plans a holds a work stoppage next Wednesday and a private-sector strike is planned a fortnight later.
Given the country’s history of violent protest, these actions are expected to provide a crucial gauge of the extent of opposition to Mr Papandreou’s efforts to regain stability of the public finances.
Portugal’s minority government lost a vote in the opposition-led parliament yesterday on a Bill that will increase regional spending, a move that compromises efforts by the Socialist administration to assert control over its public finances.
In Spain, unions have threatened protests against a €50 billion austerity plan.
