* Greece says Spain, Portugal may be next
* ECB’s Constancio pessimistic on Portugal
* Spanish unemployment tops 4 million in January
* Greece to take additional wage, tax measures
(Adds Papandreou, Barroso, Portugal minister, analysts)
By George Georgiopoulos and Harry Papachristou
ATHENS, Feb 2 (Reuters) - Greece warned on Tuesday its fiscal troubles were part of a wider euro zone problem, with Spain and Portugal next in line, and EU officials urged Athens to fix its finances before markets dragged others down with it.
Greece’s ballooning deficit and debt have reverberated across the euro group, hitting the euro currency and bond prices and prompting speculation of a bailout plan, which European Union officials have denied.
“Following Greece, there are other countries, like Spain and Portugal,” Finance Minister George Papaconstantinou told an economic conference. “This is why the Greek issue, despite its particular Greek characteristics, is also a euro zone issue.”
Prime Minister George Papandreou, who won October elections pledging to tax the rich and help the poor, said Greece was the victim of an unprecedented speculative attack, which has pushed its borrowing costs to euro-era record highs.
On the eve of an EU opinion on Greece’s deficit cutting plan, he announced tougher, EU-pleasing measures, such as extending a public sector wage freeze to lower salaries in 2010, hiking taxes on fuel and hinted at raising the retirement age.
“We are making an effort to stop the country from going over the cliff,” Papandreou said after meeting party leaders to seek their support. “The government is determined to take all necessary measures.”
Greece has been pounded by markets after revealing its 2009 budget was 12.7 percent of GDP, more than four times the EU ceiling of 3 percent and three times initial estimates.
European Commission President Jose Manuel Barroso said on Tuesday the Greek austerity plan, which the EU executive was expected to endorse on Wednesday, was risky but achievable.
“A successful correction of its very excessive deficit is not only important for Greece but for the euro area and the EU as a whole,” Barroso said in a statement.[ID:nLDE6111JI].
Greece will have no choice but to follow tough policies under intense EU monitoring, with the possibility of additional, unpopular measures later this year if results are not positive.
Athens has pledged spending cuts and tax hikes to claw its way out of the crisis but the socialist government has been slow to implement concrete measures, fearing a popular backlash.
Thousands of farmers demanding more subsidies and higher prices for produce have been blocking highways and border crossings with Bulgaria for more than two weeks, piling pressure on the government as it struggles to save the country’s economy.
The farmers’ protest is seen as the first test for the ruling socialists as they brace for strikes later this month.
Greece’s financial problems have sparked talk about a possible financial aid by the EU and fears about the stability of the 16-country euro area. EU leaders have ruled out a bailout and said Greece should sort out its own problems but economists say it is unlikely the bloc will allow a member to collapse.
Nobel laureate economist Joseph Stiglitz said on Tuesday the euro zone was not at risk of disintegrating because of the fiscal and debt strains currently troubling some of its members.
“The reason is that the European project has been a success and mutually beneficial to everyone. Therefore, everybody has a stake in seeing the system working. When there is a will, there is a way,” Stiglitz told Reuters
The spread between Greek and German 10-year bonds widened to 344 basis points on Tuesday, having tightened to 327 basis points earlier from last week’s record of 405. [ID:nLDE6111B3]
EFG Eurobank, the country’s second biggest lender, said Greece could not afford spreads of 300-350 basis points for long. [ID:nATH005166]
Greece’s problems may spill over into other vulnerable euro-zone countries, most notably Spain and Portugal.
“That’s Portugal, Ireland’s next, and then Spain. And then you’ll get a domino effect,” Dutch Finance Minister Wouter Bos told Dutch business channel RTL Z.
German Foreign Minister Guido Westerwelle, on a visit to Athens on Tuesday, said Greece’s deficit-cutting reforms were “a matter of stability for the EU.”
European Central Bank Governing Council member Vitor Constancio said Portugal needed to make significant adjustments to its economy, which was in a “serious and difficult moment”. [ID:nLDE61111R]
“Portugal has once again a budget deficit which is high and there is an imperative need to reduce it,” he said.
Constancio, who also heads the Bank of Portugal, said he was relatively pessimistic about the short-term outlook, adding difficult spending cuts were needed, and most likely a hike in indirect taxes, to cut the deficit from last year’s 9.3 percent.
Portugal’s government, however, ruled out any tax hikes in the medium term and Finance Minister Fernando Teixeira said Portugal’s problems were not the same as Greece‘s. [ID:nLSB002242] The spread between Portuguese and German bonds hit its highest level since April at 132 basis points.
News from Spain was also worrying, with the number of unemployed up 124,890 in a single month to top 4 million.
Unemployment, which the government expects to rise to 20 percent this year, is set to complicate government efforts to slash spending and cut the budget deficit to 3 percent of GDP in 2013 from 11.4 percent last year. [ID:nLDE6110NY]
Papaconstantinou said a joint euro zone bond may be the answer to the turmoil. Germany, France and the Netherlands have opposed the idea.
“There are no plans to do such a thing, and no discussions about that either,” a German Finance Ministry spokeswoman said. (Writing by Dina Kyriakidou; editing by Mike Peacock and Patrick Graham)