* Portugal, Spain have taken tough measures
* Borrowing costs in both countries rise over Greek
* Contagion frustrates countries doing their job
By Daniel Alvarenga and Fiona Ortiz
LISBON/MADRID, Nov 2 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
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.
"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
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
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.