Spain and Portugal have each announced austerity measures aimed to reduce the size of their budget deficits. Spain will reduce public-sector wages by 5% this year and freeze them next year, along with freezing pensions. Portugal is cutting salaries of government ministers and other top officials by 5% and raising their value added tax by 1% to 6% for necessities, 13% for restaurants and 21% for other items.
These countries are part of the European Union countries that market concerns about their debts led to a $1 trillion European debt backup plan that was announced last weekend. All of this was kicked off by Greece and their economic problems.
The issue is simple. At some point lenders (those that buy your countries debt) no longer believe you have the financial strength necessary to support your debt at its present rate, and they demand much higher rates. The 2-year notes of Greece went up as high as 18% rate of interest. Portugal and Spain are trying to get their house in order before something similar happens to them. The question is when will the U.S. get serious about its financial situation!?
