Europe's debt crisis heightens

BRUSSELS (AP) – Fears of another crisis spiral for the world economy deepened Friday after the Portuguese parliament defeated a government austerity plan, triggering renewed concern that the financial crisis in that country and in Greece could spread through the eurozone and spill across its borders.

Spooked investors worldwide were fleeing risky assets like stocks. And from Shanghai to Sao Paolo, people were awakening to the reality that what is happening in these European minnow states has vast implications for the fate of the fragile global economic recovery.

Stocks fell in Asia and Europe as governments in Portugal and Greece pushed against fierce political resistance at home to cutbacks aimed at getting their deficits under control.

Markets fear Greece may default or require a costly bailout from already strapped European governments, and those concerns are spreading to other financially troubled governments such as Portugal and Spain.

Portugal’s position looked even weaker Friday after opposition parties defeated a government plan for austerity measures that the country needed to pass to soothe markets and reduce the soaring cost of insuring its debt, a measure of investor fear.

“Portugal is next in line with ... what is now a very timid attempt” to bring its deficit down, said Marco Annunziata, chief economist at UniCredit.

Top EU officials, the economy commissioner Joaqin Almunia and European Central Bank head Jean-Claude Trichet, tried Wednesday and Thursday to reassure markets of the strength of the eurozone and Greece’s determination to bring down spending. But markets haven’t listened.

The reason is a growing reassessment of government finances worldwide, and knowledge that a Greek default would tear new holes in banks’ already battered finances if they hold Greek bonds, most of which were sold to west European investors outside Greece.

The Athens government has outstanding securities of euro290 billion, more than twice those of the US investment bank Lehman Brothers, whose bankruptcy brought the world financial system to its knees.

Those fears have pounded stock markets in recent days, with German, French and British stocks closing down 1.8, 3.4, and 1.5 percent down Friday. What would have been a bounce on Wall Street from positive jobs figures remained flat.

On Friday, the Portuguese opposition passed their own bill, which the government says will punch a euro400 million ($550 million) hole in its budget over the next four years. The government says it is “irresponsible” and that it will try to annul it, risking new political friction.

“The risk of contagion now is very very serious. By the end of next week, if things haven’t calmed down or if they have actually intensified further, then it will be a matter of a short while before some steps are being taken,” Simon Tilford, chief economist at the Centre for European Reform, said.

European officials have said there is no need for a bailout for Greece and that it will be able to borrow the euro54 billion it needs to plug its budget gap this year.