Fears of Greek-style meltdown mount in Spain, Portugal (News Feature)

By Sinikka Tarvainen Apr 29, 2010, 13:12 GMT

Madrid/Lisbon - Concern was mounting in Spain and Portugal on Thursday over an eventual Greek-style financial meltdown, despite government assurances that the two Iberian countries' economies had solid foundations.

'Portugal needs to apply the necessary (austerity) measures as rapidly as possible,' the daily Diario de Noticias warned, while the Spanish economic newspaper Expansion said that 'time is running out' for Spain.

Such comments abounded after the rating agency Standard & Poor's (S&P) downgraded the credit ratings of both countries amid fears that the financial crisis engulfing Greece could spread within the European Union and beyond.

In Portugal, the government and opposition joined ranks to overcome the crisis. But no such agreement was in sight in Spain, where Prime Minister Jose Luis Rodriguez Zapatero came under growing criticism over his handling of the economy.

The Spanish and the Portuguese economies share a number of weaknesses.

Public debt is seen as being at a tolerable level in both countries, measuring about 76 per cent of gross domestic product (GDP) in Portugal and 53 per cent in Spain.

Both countries, however, have remarkably high private debt levels after consumers and companies went on credit-fuelled spending sprees in economically better times.

Spain's private sector indebtedness stands at 178 per cent of GDP, according to a figure quoted by S&P, while Portugal's is about 160 per cent of GDP.

Analysts are concerned about the rapid deterioration of the two countries' public deficits. Spain now has a deficit of 11.4 per cent of GDP, down from a surplus of 2.2 per cent in 2007, while Portugal's deficit has soared to 9.4 per cent from 2.7 per cent in 2008.

Both countries suffer from low productivity, rigid labour markets and an excessive dependency on low-tech industries such as tourism and construction, according to analysts.

'The Portuguese economy resembles the Greek one in that we have constantly lost productivity and competitivity since the introduction of the euro,' said Eva Gaspar, editor-in-chief of the economic newspaper Jornal de Negocios.

One of the biggest long-term problems, analysts agree, is sluggish growth. Portugal's economic activity will stagnate this year and growth potential will remain subdued, while Spain's real GDP growth will average only 0.7 per cent annually until 2016, S&P predicted.

Spain's unemployment rate of about 20 per cent is twice that of Portugal's, creating a major threat for the country's economic stability, but analysts nevertheless see the Spanish economy as doing better for the time being.

'Portugal could already find it difficult to escape from ... an attack from (financial) speculators, while Spain still has a few weeks left to act,' financial analyst Charles Wyplosz said.

The S&P credit rating downgrades sent the Madrid and Lisbon stock exchanges tumbling and brought especially Portugal under growing market pressure, showing how vulnerable the Iberian countries had become to changes in investor sentiment.

The two countries' Socialist governments downplayed the difficulties, with Jose Socrates describing Portugal as being under an 'unfounded' attack from speculators, while Zapatero reiterated his earlier assurances that the economy would soon start recovering.

'The biggest risk (for Spain) is the attitude of the government,' Expansion said in an editorial, slamming Zapatero for constantly issuing overly optimistic forecasts while the economy continued deteriorating.

The Spanish government has announced budget cuts worth tens of billions of euros and a labour market reform, but many of the planned measures are still to become reality, the daily El Pais complained.

Spain needs to act as soon as possible, because the markets are 'more short-sighted than usual and do not see details, but only muddy masses of problems,' said European Competition Commissioner Joaquin Almunia, a former Spanish minister.

Portugal, meanwhile, announced that it would start applying some of the measures included in its austerity plan earlier than planned.

Lisbon had already been given warnings by several rating agencies before S&P spoke out, making borrowing more costly and accentuating the threat of a downward spiral.

The country's public finances remain structurally weak, despite 'substantial' public sector reforms in recent years, S&P cautioned.

The main conservative opposition Social Democrats promised to back Socrates' minority government in restoring Portugal's financial credibility, despite its criticism of some aspects of the new austerity package, such as tax hikes.

The Portuguese government was also expected to reinforce the austerity plan, while calls for similar measures were issued in Spain.

'The fiscal austerity plan is no longer sufficient,' Wyplosz said.