Portugal struggles to fight off Greek contagion fears

Portugal struggled yesterday to convince investors that the Greek debt drama had not reached its shores after a credit rating downgrade sent the country's financial markets into a tailspin.

Socialist Prime Minister Jose Socrates and conservative opposition leader Pedro Passos Coelho held an urgent meeting in a show of unity against what the government termed an "attack from the markets."

The two leaders were expected to discuss the possibility of rapidly implementing tough spending cuts aimed at slashing the huge public deficit, which grew to a record 9.4 per cent of Gross Domestic Product last year.

"All measures demonstrating the government's willingness to consolidate public finances will be aimed at reassuring investors ... and avoiding a Greek scenario," said economist Philippe Sabuco at French bank BNP Paribas.

The Lisbon stock exchange plunged by more than six per cent in morning trading one day after the downgrade from ratings agency Standard & Poor's sparked a sell-off of Portuguese equities. It later recovered to trade little changed in early afternoon.

The country's borrowing costs also soared as the yield, or interest rate, on the country's 10-year bond rose to 5.954 per cent from 5.501 per cent, while that on two-year paper widened to 5.775 per cent from 5.501 per cent.

"We have a duty towards the Portuguese people, in this difficult period, to help the government and the country," said Passos Coelho, who until now had stated that he did not feel "attached to the government's measures."

Portugal's deficit and debt have sparked fears that it could soon face the same problems as heavily-indebted Greece, which is now desperately trying to secure IMF and eurozone loans to avert default.

"Showing national unity is a good thing because the markets fear that the opposition would fight an austerity programme. It is what we fear for Greece," said Belgian economist Paul de Grauwe.

S&P cut Portugal's long-term credit rating on Tuesday to A- from A+ and warned the outlook was negative in light of the country's fiscal and economic structural weaknesses.

"The country must respond to this attack from the markets," Finance Minister Fernando Teixeira dos Santos said shortly after the downgrade.

He rejected any comparison to Greece amid concerns that the crisis in Athens would spread to other small eurozone members with big deficits, including Spain and Ireland.

"We must remain calm and bring serenity back to the markets ... As in the past, we will do what is necessary to reduce the deficit and promote the competitiveness of the Portuguese economy," he said.

The Portuguese government has imposed a four-year freeze on civil servants' pay in a bid to cut the country's public deficit to 8.3 per cent of GDP in 2010 and under the EU limit of three per cent in 2013.

It is also planning to privatise several state-owned companies, thereby adding €6 billion to its revenues, including €1.2 billion this year.

The government has projected that public debt would reach €142 billion, or 86 per cent of GDP this year.

The financial daily Diario Economico launched a campaign yesterday urging political rivals to "Agree With Each Other" and invited readers to sign up to it on its website.

"The crisis situation forces the government, which has a minority in parliament, and the main opposition party to rapidly come to an agreement," the newspaper said.