Update: EU Crafts $962 Billion Show of Force to Halt Euro Crisis

05-09-2010 • Bloomberg.com

The new war chest would be used for countries like Portugal or Spain in case their finances buckle. Deficits are set to reach 8.5 percent of gross domestic product in Portugal and 9.8 percent in Spain this year, above the euro region’s 3 percent limit. Both countries pledged “significant” additional budget cuts in 2010 and 2011, which will be outlined in May, an EU statement said. The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds rose to euro-era highs last week. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain. Greece, the epicenter of the debt crisis, has already won a 110 billion-euro aid package after agreeing to unprecedented austerity measures. The cuts sparked riots in Athens last week, leading to three deaths and stoking concerns that the government won’t be able to implement all the steps.