Greek uncertainty galling for diligent Spain, Portugal

Wed Nov 2, 2011 10:48am EDT

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* Portugal, Spain have taken tough measures

* Borrowing costs in both countries rise over Greek uncertainty

* Contagion frustrates countries doing their job

By Daniel Alvarenga and Fiona Ortiz

LISBON/MADRID, Nov 2 (Reuters) - Greece's surprise call for a referendum on austerity measures has been a particularly harsh slap for Portugal and Spain, where diligent belt-tightening once again has been undermined by factors beyond their control.

Greek Prime Minister George Papandreou blindsided his own political party and European leaders by calling on Monday for a plebiscite on a 130 billion euro ($177.8 billion) bailout package that imposes painful conditions for shrinking public spending. Papandreou faced a grilling from the leaders of Germany and France at crisis talks later on Wednesday.

The renewed uncertainty had an immediate contagion effect in Iberia.

Spain's borrowing costs soared on Tuesday to their highest levels since record highs in August, when they were also hit by Greece after word that it would need a second bailout.

In Portugal, seen as the next weakest link in the European Union after Greece, short-term borrowing costs hit a euro lifetime record in an auction on Wednesday, with analysts blaming the Greek referendum plan.

"Greece just keeps hurting us. We are also paying the bill for the state of things in Greece," said Antonio Coelho, 49, a shoe shop owner in downtown Lisbon.

"Papandreou is trying to flee from his responsibilities, hide his behind from the syringe, so to speak. We risk being dragged along if Greece goes bust and leaves the euro," he said.

Foreign Minister Paulo Portas has said the government is worried by Greece's move as it stirs uncertainty, but that Portugal, by contrast, wants to show that it is stable and committed to meeting its own bailout goals.

The centre-right coalition government took over last June backed by a solid majority in the Lisbon parliament. It has announced tax increases and spending cuts beyond those agreed under the 78-billion euro EU/IMF bailout to guarantee that its budget deficit targets are met at any cost.

AVOIDING CONTAGION

"The European Union must immediately avoid contagion and put in practice the agreed-on (rescue plan for Greece)," said Diego Lopez Garrido, the Spanish Secretary of State for the EU, calling a popular vote in Greece a mistaken approach.

Spain has applied preventive spending cuts to avoid being forced into a rescue package like Greece, Ireland and Portugal, and has maintained fiscal discipline even as the jobless rate hit 15-year highs and the economy has stagnated.

Spain's commitment to economic reforms has been solid enough that the euro zone's No. 4 economy has a lower risk premium on its debt than Italy, whose bonds and bank shares were ravaged this week due to concerns over shaky political resolve.

Even though many investors expect Spain to miss its ambitious target to cut its public deficit to 6 percent of economic output this year, most expect cuts to deepen after an imminent change in government.

Spain's centre-right People's Party (PP) is poised to win the Nov. 20 parliamentary election by a wide margin, kicking out the Socialists who have been in power eight years and are widely blamed by voters for the country's economic woes.

The PP has been cagey about details of its economic agenda, that the likely next prime minister, Mariano Rajoy, has pledged to meet ambitious deficit reduction goals in 2012 despite expected slippage this year, a situation that implies drastic spending cuts since he proposes some tax cuts for companies.

"We needed to make the reforms anyway, so it was good for us. Now we'll just have to wait to see the result of the referendum," said Pedro Schwartz, economics professor at San Pablo University in Madrid. "There will be more reforms to come in any case after the general election."

PROTESTS MUTED IN IBERIA

While there have been protests against austerity in Spain and Portugal, they have not been intense enough to derail commitment to spending cuts or to cause political turmoil.

In Greece, however, Papandreou's party has seen defections as mass protests turned violent and strikes paralysed many business sectors.

A Greek meltdown could render useless all of the painful austerity and political sacrifices on the Iberian peninsula.

"The damage inflicted on Europe is impossible to repair," said an editorial in Spain's main business paper, Expansion, on Wednesday.

Spanish officials have long wrung their hands in private over the contagion effect from Greece.

"We did our job, we removed imbalances from the economy. But contagion can be stronger than measures," a high-level Spanish official told Reuters recently.

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