Stock markets plunge on debt fear

Greece, under intense pressure from markets and other European Union governments to get control of its budget deficit, faced a first wave of strikes, customs and tax officials walking out for 48 hours.

Doubts about its finances have also affected market sentiment towards the debt of Portugal and Spain, two other eurozone countries that are struggling.

A Greek default would be a serious blow to the shared euro currency, but Greece and the EU have insisted that it will not happen and that Athens can fix its problem with a programme of sharp cuts and efforts to make its economy more competitive.

Spain's finance minister Elena Salgado dismissed worries that her country's debt and other economic problems posed a Greek-style risk for the eurozone, saying "there is no comparison" between the Spanish and Greek positions.

Spanish Prime Minister Jose Luis Rodriguez Zapatero's government announced last week its deficit for 2009 was equal to 11.4 per cent of Gross Domestic Product (GDP), nearly four times the EU limit. It announced a four-year austerity programme with 50 billion euros of spending cuts to try to bring the deficit back down to three per cent of GDP in 2013.

Markets remained sceptical, however, the Ibex-35 index at the Madrid stock market plunging 5.94 per cent – the largest drop since November 2008.

Share prices on the Lisbon Stock Exchange in neighbouring Portugal also fell sharply, with the benchmark PSI-20 index closing down 4.98 per cent – also the steepest fall since November 2008.

Portugal's minority Socialist government is facing potential defeat against opposition parties which want to rise spending in some areas, and who could out-vote the government in today's parliamentary session. The minister for parliamentary affairs, Jorge Lacao, warned of "serious political consequences" if Parliament passed the opposition proposal.

Greece's customs strike will choke imports until next week, with fuel supplies likely to suffer first. Lines of trucks were already forming at the country's borders, with customs workers allowing through only perishable goods and pharmaceuticals.

More walkouts are planned for later this month, the country's two largest umbrella union organisations calling separate 24-hour strikes, one for next Wednesday and one for February 24.

Socialist Prime Minister George Papandreou said during a visit to India, where he was attending a conference on sustainable development: "We are determined to make these changes and we have asked everyone to contribute to this programme."

Mr Papandreou has pledged to bring Greece's budget deficit down from 12.7 per cent of economic output to two per cent in 2013, and this week broadened his austerity plan to include blanket civil servant pay freezes, increased retirement ages and a hike in fuel tax.

The European Union has endorsed the plan, with Economy Commissioner Joaqin Almunia saying it was "achievable".

A European Commission report pressed Greece to tackle problems of competitiveness, including high public and private sector wage levels.

But it has not been enough to calm jittery markets, which seem worried that political resistance to cutbacks will keep Greece and Portugal from sticking to their plans.