Irish crisis fuels bailout fears in Spain and Portugal (News Feature)

By Sinikka Tarvainen Nov 23, 2010, 15:45 GMT

Madrid/Lisbon - Concern was mounting Tuesday in Spain and Portugal that they could follow Greece and Ireland in needing international bailouts and could drag down the euro.

'Spain could be next,' the Spanish online publication Intereconomia warned, while Portuguese far-left politicians accused their government of exposing the country to an intervention by the International Monetary Fund (IMF).

Portugal was 'on the road (leading to) the Irish disgrace,' said Francisco Louca from Left Bloc.

Officially, Madrid and Lisbon insist that their economies are more solid than Ireland's.

Spain's economic reforms had distanced it from 'countries with problems,' Economy Minister Elena Salgado said, while Portuguese Prime Minister Jose Socrates said his country would 'solve its own problems' without needing bailouts.

Such attempts to reassure international financial analysts were unsuccessful as market pressure kept mounting on both economies.

Analysts say the next eurozone country to need financial assistance from the IMF and the European Union could be Portugal, which has a budget deficit of 9.3 per cent, high levels of private debt and unemployment of 10 per cent.

Parliament is in the process of approving an austerity budget aimed at slashing the deficit to 4.6 per cent in 2011.

But not everyone is convinced that the government can cut the deficit that much.

The austerity measures were also expected to undermine the timid growth prospects of the economy which shrank 2.7 per cent in 2009.

Socrates' Socialist government has also faced constant protests over its liberal economic reforms, and Portugal's two top trade union confederations have called a general strike for Wednesday.

Former finance minister Bagao Felix warned Portugal was the most- watched country by financial markets currently.

Felix said he expected the turmoil to subside in the coming weeks. 'But then the attention will focus us,' he warned.

A greater worry for the EU is Spain, a far bigger economy than Portugal, Greece or Ireland.

A financial collapse in the eurozone's fourth-largest economy would require a huge bailout, drag down dozens of French and German banks which have financed Spain's growth, and possibly the euro as well, Spanish analysts warned.

Spain - like Portugal - stresses the relative solidity of its banking sector and its relatively low public debt.

Yet Spain's private debt - contracted by companies and households in economic boom years - has rocketed to more than 170 per cent of gross domestic product (GDP). Budget deficit stood at 11.2 per cent of GDP in 2009.

Spain also suffered an Irish-style collapse of its property sector, which worsened the effects of the global crisis.

Unemployment is running at 20 per cent, the highest in the EU.

Spain's economy was less competitive than Ireland's, and its markets were more rigid, Intereconomia warned.

'As long as we do everything we have said we will do, there will not be any problem,' Spanish finance ministry secretary of state Carlos Ocana said Tuesday.

Yet many analysts felt Prime Minister Jose Luis Rodriguez Zapatero's measures so far - austerity packages, a labour market reform, moves to encourage regional bank mergers - were far from sufficient.

Bank of Spain governor Miguel Angel Fernandez Ordonez insisted on the importance of a plan by the government to raise the retirement age, in the face of opposition from trade unions.

One hundred top entrepreneurs and economists signed a manifesto describing Spain's economic situation as 'very serious.' They called for reforms to unify company legislation across the country's 17 semi-autonomous regions.

The real challenge, analysts said, was to transform the economic structures of Spain and Portugal, which remain overly dependent on labour-intensive or service sectors.

The Zapatero government has tried to encourage a more competitive and innovative 'new economic model,' but critics say tougher measures are needed.

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