Portugal on Monday became the latest eurozone country to announce austerity measures to rein in a ballooning budget deficit as debt-stricken Greece urged global action to curb speculation in credit default swaps (CDS).
European Commission sources said that finance ministers of the 27-nation bloc would discuss ways to dampen speculation in the sovereign CDS market at their scheduled meeting on Tuesday next week.
Hedge funds have been accused of aggravating the Greek debt crisis by so-called “naked short selling” — betting on a default without owning the underlying Greek bonds, hence forcing up Athens’ borrowing costs.
Greek Prime Minister George Papandreou, who took draconian austerity measures last week to stem attacks on his country’s debt, called credit default swaps a “scourge” that threatened the Greek and global economy and asked the US to join Europe in action on the issue.
“We need clear rules on shorts, naked shorts and credit default swaps. I hope there will be a positive response from this side of the Atlantic to bring this initiative to the G20,” Papandreou told the Brookings Institution on a visit to Washington, where he was to meet US President Barack Obama yesterday.
Portugal announced plans to cut its deficit to 2.8 percent of GDP in 2013 from 8.3 percent this year by trimming spending on civil servants and public investment, and raising taxes on high incomes and stock market gains.
The program is seen as the key to convincing markets that Portugal will tackle its high deficit and debt after coming under scrutiny by investors fearing it may be next in line to have Greece-style fiscal problems.
Under the plan, Portugal’s public debt would peak at 90.1 percent of GDP in 2012 and fall thereafter. Greece’s debt is set to reach 125 percent of GDP this year.
“This is a bet on reducing the weight of the state in the economy and the weight of public spending,” Portuguese Finance Minister Fernandio Teixeira dos Santos said.
Analysts said the Portuguese stability program was more cautious than Greece’s in its growth and revenue assumptions, but extra measures might still be required if growth fell short.
Portugal’s spread over benchmark 10-year German bunds stood at 109 basis points on Monday, down from a peak of 175 basis points on Feb. 4 at the height of the market panic over Greece. Spain’s spread was down to 67 basis points, the lowest since mid-January.
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