Debt-burdened Portugal came under increased market pressure Tuesday, as borrowing costs surged and stocks fell sharply.
The market drops deepening the government's woes as it faced a strike by public transport workers over a pay freeze designed to help curb state spending.
Portugal is trying to avoid the fate of Greece, which is facing a full-fledged debt crisis as markets fear Athens will have to restructure its heavy debt load.
As a result, Greek bonds are being sold off and its borrowing costs have risen so high that Athens is appealing to other euro zone countries and the International Monetary Fund for 45 billion euro ($59.88 billion) bailout loans.
The interest rate gap, or spread, between Portuguese and benchmark German 10-year bonds trading on financial markets — a key indicator — rose 32 basis points, or 0.32 percentage points, to hit 5.51 percentage points. It was the widest gap since the shared euro currency, which Portugal and 15 other nations use, came into circulation.
The Lisbon Stock Market's benchmark PSI-20 index, meanwhile, plunged 3.4 percent by early afternoon.
Portugal is seen as one of the euro zone's most vulnerable countries after Greece. It fears contagion from difficulties in Athens where authorities are still negotiating the terms of the euro zone and IMF bailout package, with Germany demanding strict cutbacks as a condition of the loans. The delay in getting the money, however, is making markets nervous about Greece's ability to pay debt coming due next month.
Portugal's frail economy and weak growth prospects have sharpened investor concerns about Lisbon's ability to meet future debt payments, and markets are demanding high insurance payments against the danger of it defaulting.
Portugal's budget deficit stood at 9.4 percent of gross domestic product last year. It public debt will be 86 percent of GDP this year, still lower than Greece's 124 percent but still a huge burden which the government expects to peak at 90.1 percent 2012 before falling back.
The government predicts growth of 0.7 percent this year and 0.9 percent in 2011. But the European Commission has expressed concern those growth forecasts could be too optimistic.
As part of its effort to alleviate the country's debt load the center-left Socialist government has introduced a pay freeze for civil servants and staff at publicly owned companies.
The austerity plan has triggered outrage from trade unions, and public transport workers went on strike Tuesday.
The walkout stopped trains, buses and ferries, forcing many commuters to take their cars into the capital, Lisbon, and the second-largest city Porto where police reported road congestion.
Minister without portfolio Pedro Silva Pereira said it was wrong to demand pay hikes when the difficult economic times demanded sacrifices.
"The hardships have to be shared by all," he said.
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