EU warns Portugal may need more budget cuts, suggests tougher rules to dampen debt crisis

EU wants tougher rules, warns Portugal on budget

BRUSSELS — The European Union’s executive warned Portugal that it may need extra budget cuts and announced that it wanted to sharpen budget rules to prevent more European governments from following Greece into financial crisis by flouting debt and deficit limits.

Greece’s massive budget gap and soaring debt have rocked Europe’s currency union and exposed the flaws in the rules that the 16 nations that use the euro are asked to obey — but without any real threat of punishment.

EU Economy Commissioner Olli Rehn told reporters that “peer pressure has lacked teeth” and that he would suggest ways to toughen sanctions in a May 12 paper, such as blocking EU funds for economic infrastructure such as roads.

In another move to stem Europe’s government debt crisis, a European Commission report said Portugal should toughen its austerity program if its economy worsens and it can’t make hoped-for savings to reduce its deficit from 9.3 percent of national income to 8.3 percent this year.

Portugal’s finance minister said he was ready to do more if necessary “but that need isn’t there at the moment.”

Like Greece, Portugal is a eurozone member struggling with mounting debt, rising jobless numbers and low growth prospects — which last month caused Fitch Ratings to downgrade the country’s debt rating.

Its austerity efforts are closely watched by financial markets looking to see whether Greece’s borrowing problems could spread to another part of the euro area — and force another country to consider seeking a bailout. The global financial turmoil and recession has led to eurozone governments piling on debt, as it has in the United States and Britain.

Greece won a promised €30 billion last-resort loan package from all eurozone nations on Sunday, a pledge that has reassured markets worried that Athens could default and that has reduced the interest rates they are demanding for buying Greek bonds.

Finance Minister George Papaconstantinou did not rule out using the standby loans, saying the government would keep trying to raise money from markets. It needs to borrow some €11 billion ($14.9 billion) next month, out of a total €54 billion ($73 billion) it needs for 2010.

“The mechanism is not our first choice … but if we consider it necessary, we will use it. That decision is based on a number of factors, one of them being the interest rates,” he said on Greek state television.

Germany and the European Central Bank argued that interest rates had to be high enough to prevent Greece getting a free ride. The agreed rate of around 5 percent is higher than the eurozone average but much lower than recent Greek borrowing costs of around 7 percent.

German lawmakers may end up arguing over that rate if Greece asks for the bailout loans. German government spokesman Michael Offer said the parliament would have to debate and approve the country’s €8.4 billion ($11.4 billion) contribution — which could take weeks or months.

The German announcement sent Greek bond yields sharply higher, by 3.95 percentage points over the benchmark 10-year German issue and surging up to 28 basis points in Wednesday trading. The higher the spread, the less confidence in Greece’s ability to pay — and the more it costs the government to raise money. Shares on Athens stock market also fell below 2,000 points to close to 1,987.

The EU’s Rehn said any bailout should be a “safety net of last resort so unattractive that no country voluntarily wants to use it.”

He said there is now a “sense of urgency” to prevent other countries, particularly in the eurozone, from repeating Greece’s mistakes. EU regulators are suggesting more oversight of EU nations’ economies to watch out for warning signs. They currently only monitor debt and deficit.

Rehn rejected German Chancellor Angela Merkel’s suggestion of expelling a country from the euro currency if it keeps breaking the rules, saying he believed it would require changes to the European treaties — a difficult process — and also went against the spirit of European unity.

Associated Press writers Derek Gatopoulos in Athens and Barry Hatton in Lisbon contributed to this story.