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Greek woes ‘spread to Spain, Portugal’

Spanish and Portuguese shares were dragged down Thursday by mounting worries over the health of their public finances following similar fears in Greece that have rocked the single European currency.

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The rising debt burdens of Spain and Portugal have triggered concerns that they could follow in the shaky footsteps of Greece, whose budget crisis prompted the European Union to place it under unprecedented scrutiny.

The financial strains of the three eurozone members have weighed heavily on the euro, the European single currency, which fell under 1.38 dollars for the first time in more than seven months on Thursday.

Stocks in Spain plunged by nearly six percent while Portuguese shares were down almost five percent.

“European bourses and bond markets are lower on mounting concern that the Greece scenario will spread to others, particularly Portugal as well as Spain and a number of Eastern European countries,” said Jon Gencher, foreign exchange director at BMO Capital Markets.

The budget troubles in Spain, Portugal and Greece have put pressure on their sovereign bonds too, raising the premiums they have to pay to borrow money in recent days.

Luxembourg Prime Minister Jean-Claude Juncker, who heads the eurogroup of finance ministers from the countries using the euro, brushed aside concerns over Spain and Portugal, saying: “They don’t pose a risk”.

Portuguese Finance Minister Fernando Teixeira dos Santos insisted that his country had “nothing to do with Greece” and lashed out at investors targeting his country as “prey.”

“Investors have an animal spirit,” he said. “There is something irrational in the way they behave.”

Spain’s stocks slide was a reflection of investor concerns for the health of public finances, fuelled by rumors of a possible outlook downgrade by an international ratings agency, either Fitch or Moody’s.

A third agency, Standard & Poor’s, lowered its outlook on Spanish debt in December. The three agencies have already downgraded Greece’s credit rating.

“The Spanish crisis is very strong,” International Monetary Fund managing director Dominique Strauss-Kahn told France’s RTL Radio, noting that it stemmed from a plunge in the housing sector similar to the one in the United States.

“The Spanish have to make a considerable effort…. You can’t emerge from the crisis without paying a cost,” he said.

With the country mired in recession and grappling with the collapse of its real estate bubble, Spanish public finances have deteriorated sharply since 2007, tarnishing the image of the broader national economy.

The European Commission approved Greece’s austerity budget on Wednesday but put the country under a permanent system of monitoring, a first in the European Union.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia irritated Madrid and Lisbon after mentioning Spain, Portugal and Greece in the same breath on Wednesday.

“Some members of euro area with different starting points, with different size of their imbalances, with different characteristics of their economies and so on, share some common problems,” he told reporters.

European Central Bank chief Jean-Claude Trichet said Thursday the high deficit and debt in some countries was placing an “additional burden” on monetary policy and undermining the bloc’s stability and growth pact.

“Against this background, it is of paramount importance that the stability programme of each euro area country clearly defines the fiscal exit and consolidation strategies for the period ahead,” he said after the bank kept its benchmark interest rate at a record low 1.0 percent.

Spain last Friday announced plans aimed at slashing its public deficit to the EU limit of 3.0 percent of total output by 2013 after it mushroomed to 11.4 percent last year.

But public debt is projected to rise from 55.2 percent of gross domestic product in 2009 to 74.3 percent in 2012, above Europe’s 60-percent limit.

Greek debt has reached a massive 113 percent while its deficit rose to 12.7 percent last year. The socialist government has vowed to bring the deficit under the EU limit in 2012.

Portugal’s deficit rose to 9.3 percent last year, a record since the advent of democracy in 1974.

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