Now Portugal takes austerity path

Calls for an IMF-style fund to cope with future EU debt crises

LISBON - Portugal became the latest euro zone 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.

The European Commission said it was prepared to propose the creation of an IMF-style European Monetary Fund (EMF) to cope with future debt crises in the euro single currency zone.

German Chancellor Angela Merkel said she favored the idea, which she said would require a change in the European Union (EU) treaty, but the European Central Bank's chief economist branded it illegal.

EU sources said finance ministers of the 27-nation bloc would discuss ways to dampen speculation in the sovereign CDS market at their next meeting on March 16.

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 United States to join Europe in action on what has become a highly controversial issue for countries around the world.

"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," he told the Brookings Institution on a visit to Washington, where he was due to meet US President Barack Obama.

Germany's financial regulator BaFin said it had found no evidence so far of massive speculation in Greek bonds since January, although demand for insurance of Greek debt had increased due to country risk.

BaFin said it was keeping a close eye on euro zone sovereign debt and credit derivatives markets.

Portugal announced plans to cut its deficit to 2.8 percent of gross domestic product 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 Greek-style fiscal problems.

Under the proposals, Portugal's public debt would peak at a massive 90.1 percent of gross domestic product (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.

REUTERS

(China Daily 03/10/2010 page14)