Don't worry, be happy, the IMF will save the day! A look at our future.Submitted by DeMolay on Thu, 02/04/2010 - 17:27
Markets hammer euro states as fiscal fears mount
Thu Feb 4, 2010 3:47pm EST
LISBON (Reuters) - Investors sold off stocks in Portugal, Spain and Greece and the euro plunged on Thursday as market fears over the fiscal problems of debt-laden southern members of the euro zone widened.
The head of the International Monetary Fund called for painful steps to cut huge fiscal deficits across Europe, saying no country should be under the illusion it was possible to escape the financial crisis without paying the cost.
The Portuguese government's defeat over a regional finance bill, a climbdown by the Spanish government over pension reform, and protests by tax officials in Greece added to the woes of states struggling to cut budget shortfalls bloated by recession.
IMF Managing Director Dominique Strauss-Kahn said his organization was ready to help Greece, which is under more pressure over its finances than any other bloc member, but expressed confidence the government would take the "very difficult measures" needed to deal with its fiscal crisis.
The Greek government reiterated on Thursday that it had no plan to seek assistance from the IMF.
The euro plunged to a seven-month low against the dollar as traders took the view that dismal public finances in the single currency area may hamper the region's economic growth prospects.
Spain's Ibex 35 stock market index fell 5.9 percent, while Portuguese shares fell 5 percent, led by a 7.5 percent slump in Millennium bcp, its biggest bank. The Athens stock market shed 3.3 percent, with the Greek banks index down 5.4 percent.
European Central Bank President Jean-Claude Trichet said deficit-cutting measures announced by the Greek government were "steps in the right direction" and the ECB approved of the goals which Greece now has to meet.
He stressed that all states must meet the terms of Europe's pact on budgets and debt, and underlined that help Greece receives as a euro zone member is subject to that condition.
Later on Thursday, Greece's Finance Minister George Papaconstantinou announced that public sector pensions would increase by 1.5 percent this year, just above the government's inflation forecast of 1.4 percent.
The announcement came amid strong EU pressure for Greece to cut its public wage bill and two days after the Greek prime minister pledged to take tough cost cutting measures to get the country out of a severe debt crisis.
PORTUGAL VOTE LOST
Portugal's minority Socialist government lost a key parliamentary committee vote on a bill allowing regional financial transfers which it said would add 100 million euros in debt and make it harder to cut the budget deficit.
"Approval brings problems for governability and will have serious political consequences," Portugal's Parliamentary Affairs Minister Jorge Lacao said before the center-right opposition and the communists combined to defeat the government.
A spokesman for Prime Minister Jose Socrates denied a report in the leading daily Publico that the premier had threatened to quit over the issue. The full parliament vote is due on Friday.
Amid an outcry from labor unions and media, Spain withdrew a line on pension reform plans from an official document sent to the European Commission. It had suggested an increase in the number of years Spaniards would have to pay contributions.
The largest Spanish union confederation, Comisiones Obreras (CCOO), said it would organize protest marches during the last week of February against the government's proposal to raise the retirement age to 67 from 65.
Spain admitted on Wednesday that its budget deficits for the next three years would be higher than previously forecast. Debt markets worry that the government will struggle to cut spending at a time when unemployment is nearing 20 percent.
Strauss-Kahn said he understood Spanish Prime Minister Jose Luis Rodriguez Zapatero's dilemma over pension reform, but warned the Spanish "really need to make a considerable effort".
The premiums that investors demand to hold Portuguese bonds rather than benchmark German Bunds widened on worries that Greece's fiscal problems could be mirrored by other highly indebted euro zone countries.
However Spain did manage to sell 2.5 billion euros ($3.47 billion) in 3-year bonds in a move that Calyon strategist Peter Chatwell said should quell some jitters in the Spanish market, while leaving Greece and Portugal under pressure.
"Small irregularities in fiscal or funding spheres are being picked up by the market and magnified in spread moves," analysts from Nomura investment bank said in a note. "A case in point was yesterday's T-bill auction by Portugal."
The Portuguese debt management agency cut a planned treasury bill issue on Wednesday due to high borrowing costs, spooking the bond market.
Greece has the highest debt ratio of any euro zone country, expected to reach 120 percent of gross domestic product this year. Portugal's debt is expected to reach 84.5 percent of GDP and Spain's just 66.3 percent, below the euro zone average. However both countries' debt stock is rising fast.
Greece won heavily conditioned EU approval on Wednesday for a three-year plan to cut its budget shortfall from 12.7 percent of GDP in 2009 to below the EU ceiling of 3 percent by the end of 2012. Brussels placed Athens under unprecedented close surveillance, out of mistrust of its economic statistics.
Highlighting the risk of social unrest, Greek tax officials staged the first of a series of public and private sector workers' strikes that will affect Greece this month.
A Portuguese public sector union plans a demonstration on Friday in central Lisbon.