After Spain cut public salaries, Portuguese ministers yesterday took their turn to enforce a fiscal "shock" to stop the country becoming the next battleground in Europe's debt crisis.
While Australia's central bank warned that Europe's turmoil could hit Asian growth, international share prices roses as markets decided that the measures could just work.
Portugual's Socialist government was to announce tax hikes, wage cuts and a freeze in major public works as it battles to reduce Portugal's public deficit from a record 9.4 per cent to target of a 5.1 per cent of gross domestic product by next year.
The Jornal de Negocios business daily described the measures as a "fiscal shock," ahead of the Cabinet meeting to put the final seal on the cuts. "All taxes are going up," reported Diario de Noticias.
Reports said the salaries of ministers, members of parliament, local elected officials and heads of public companies would be cut by five per cent.
As a member of the eurozone Portugal is bound to hold its annual public deficit to under three per cent of output.
Portugal's public debt, which came to 76.6 per cent of GDP last year, is projected to widen to 86 per cent in 2010, beyond the 60 per cent eurozone rule.
Portugal and Spain, like Greece, are struggling to stabilise deficit-plagued public finances that have eroded market confidence and driven up borrowing costs.
Spain's Socialist Prime Minister Jose Luis Rodriguez Zapatero on Wednesday ordered a five per cent pay cut for public workers, a partial freeze on pensions and the scrapping of a €2,500 payout for the birth of new children as he seeks to save an extra €15 billion over two years.
His cuts were in addition to a €50-billion austerity package announced in January designed to slash the deficit to three per cent of GDP by 2013 from 11.2 per cent last year.
"Zapatero gets out the big scissors," said Spain's economic daily Cinco Dias.
Spain and Portugal's deficit attack followed creation of a €750-billion fund to help debt stricken nations in the eurozone. Europe's main stock markets in London, Frankfurt and Paris all rose in early trade yesterday amid new cheer over the continent's prospects.
Tokyo closed more than two percent higher and Hong Kong and Sydney were also up.
But Australia's central bank warned that Europe's renewed financial turmoil could pose a risk to Asian growth.
Assistant governor of the Reserve Bank of Australia Phillip Lowe said emergency measures to stave off a European debt crisis had gone some way to restoring investor confidence, but doubts could resurface.
"Despite the recent announcements having stabilised confidence in Europe, concerns about public finances could build again," Mr Lowe said in speech in Sydney.
"If they did, it would weigh on growth prospects for the countries directly concerned, and it could also weigh on prospects in Asia, particularly if it were associated with a marked increase in risk aversion globally."