Portuguese leaders agreed tough new austerity measures today, joining a coordinated euro zone push that has so far calmed the markets' worst fears of a Greek-style debt crisis spreading.
Portuguese prime minister Jose Socrates and opposition leader Pedro Passos Coelho drew up steps to reduce the budget deficit by about €2 billion, half from spending cuts and half from increases in sales, income and profits taxes, a source close to the talks said.
At the weekend, Portugal's government had said it would cut its 2010 deficit by one percentage point to 7 per cent of GDP.
Like the harsh steps announced by Spain yesterday, the measures are the painful price indebted euro zone states must pay for protection by the €750 billion safety net announced by the EU and IMF at the weekend.
"The crisis of the future of the euro is not just any crisis, it is the strongest test Europe has faced since 1990, if not in the 35 years before," said Chancellor Angela Merkel of Germany, whose voters resent shouldering much of the cost of the potential bailouts.
"This test is existential - it must be passed."
World stocks have gained around 6 per cent since the rescue package was announced. The euro was stronger today but still close to recent lows against the dollar.
"It's going to be a long, challenging and bumpy road in order to stabilise the finances of many countries within the euro zone, but it's absolutely necessary that they take those first steps," said Henk Potts, equity strategist at Barclays Wealth.
State-run Lusa news agency cited an unidentified government source as saying one of the proposals includes a 5 per cent wage cut for state companies' managers and politicians.
The Portuguese government has promised further to trim next year's deficit by an extra 1.5 percentage points.
Last year, Portugal's budget gap hit 9.4 per cent of GDP after just 2.7 per cent in 2008. Investor concerns have prompted a sell-off of Portuguese assets since January.
The new coalition cabinet in Britain, a member of the EU but outside the euro currency, met for the first time today and agreed a 5 per cent pay reduction for all ministers.
Less symbolic and more substantial cuts are high on its agenda to tackle a record budget deficit, marking the end of "spend-to-mend" policies advocated by former prime minister Gordon Brown in response to global downturn.
Those policies, applied by many governments, led to a glut of bond issuance which, in the case of highly indebted states, investors became reluctant to buy.
Spanish and Portuguese borrowing costs soared last week as investors fled peripheral euro zone government bonds.
Reuters