Bond traders probing for weak links in the euro zone trained their guns on Portugal today as the head of the International Monetary Fund called for painful steps to cut huge fiscal deficits.
Political tension in Portugal over a regional spending bill and a climbdown by the Spanish government over pension reform added to the woes of peripheral euro zone states facing huge challenges to curb budget shortfalls bloated by recession.
IMF managing director Dominique Strauss-Kahn said his organisation was ready to help Greece, which is under more pressure over its finances than any other member state, but expressed confidence the government would take the "very difficult measures" needed to deal with its fiscal crisis.
Speaking on France's RTL radio, he said no country should be under the illusion that it was possible to escape the financial crisis without paying the cost.
Amid an outcry from labour unions and media, Spain withdrew a paragraph on pension reform plans from an official document sent to the European Commission that suggested an increase in the number of years Spaniards would have to pay contributions.
Mr Strauss-Kahn said he understood Spanish prime minister Jose Luis Rodriguez Zapatero's dilemma over pension reform, but cautioned that the Spanish "really need to make a considerable effort".
Portuguese stocks fell sharply and the cost of insuring Portuguese debt against default hit a record high ahead of a parliamentary vote on a bill the minority Socialist government says would make it harder to reduce the budget deficit.
A spokesman for prime minister Jose Socrates denied a report in the leading daily Publico that the premier had threatened to resign over the issue, prompting president Anibal Cavaco da Silva to call a high-level meeting to talk him out of it.
The premiums that investors demand to hold Portuguese bonds rather than benchmark German Bunds widened on worries that Greece's fiscal problems could be mirrored by other highly-indebted euro zone countries.
However Spain did manage to sell €2.5 billion in three-year bonds in a move that Calyon strategist Peter Chatwell said should quell some jitters in the Spanish market, while leaving Greece and Portugal under pressure.
Reuters