Greece and Portugal under pressure over debts

The debt crisis in the eurozone overshadowed Monday’s Brussels summit, where EU leaders developed their plans for a fiscal pact to bring budgetary discipline to member states.

Greece, the most vulnerable member, is in negotiations with private investors who own Greek government bonds – and Athens now says it may need more help from the EU and International Monetary Fund (IMF).

Portugal bailout fears

Investors are concerned that Portugal, which received 78bn euros from the EU and IMF in 2011, may need another tranche of money, although Lisbon denies this.

In contrast to Spain and Italy, its borrowing costs have risen, but Prime Minister Pedro Passos Coelho said bondholders would receive their money back.

Greece is due to receive a 130bn euro package, but must strike a deal with bondholders before it is given the money. Prime Minister Lucas Papademos said on Tuesday that “it’s too early now to say whether we will need some extra public funding”, adding that his goal was to “avert such an alternative”. But he said progress had been made in talks with bondholders.

Disorderly default

There is a danger that Greece could be forced into a disorderly default on its debts if it does not receive help before the 20 March deadline to repay 14.5bn euros it has borrowed. This would have ramifications for the entire eurozone, heaping further pressure on other indebted countries.

Germany is so concerned by what it sees as Greece’s failure to bring its spending under control that it has suggested an EU budget commissioner should be appointed with powers to overrule Athens.

This has sparked outrage in Greece, which sees the proposal as a threat to its national sovereignty – and on Tuesday the head of the eurogroup, Jean-Claude Juncker, said there was no need for this kind of intervention.

Unemployment rises

Another worry for Europe is unemployment, which has risen to its highest level since the single currency was introduced in 1999. Among the 17 nations of the eurozone, there are now 16.5 million people out of work (10.4 per cent of the working-age population).

But joblessness is far higher in some southern European countries. Martin van Vliet, an economist at ING, said: “We’re looking at a further increase over the coming months, so that is worrying. Look at Greece, where unemployment is some 20 per cent, and it is 23 per cent in Spain. At a certain point this could lead to political unrest.”

It is an issue that occupied European leaders at their summit in Brussels. They agreed to use 82bn euros of unspent funds to boost employment.

The problem for heavily indebted southern European countries is that they are finding it hard to boost growth while pursuing austerity measures.

Trevor Greetham, portfolio manager at Fidelity Multi Asset Funds, said: “A budgetary straitjacket risks merely shrinking Europe’s economy and it will do nothing to ease the periphery’s competitiveness problems, the underlying cause of the sovereign crisis.”