The exploding debt burden and weak economic competitiveness of Portugal and Greece put their economies in grave danger, according to Moody’s Investors Service.
The two nations failed to improve their fiscal balances and competitiveness during the boom years, so now their problems are coming home to roost, Moody’s said in a report.
"This competitiveness gap is likely to result in countries 'bleeding' economic potential and therefore tax-raising capacity if not reversed."
Greece’s budget deficit totaled 12.7 percent of gross domestic product, or GDP, last year, and Portugal’s was 8 percent.
European Union rules mandate a ceiling of 3 percent.
The governments in Greece and Portugal may have to push interest rates higher to entice foreign investors to purchase their bonds.
And they may have to raise taxes to attack the debt woes.
"Over time, this chain of events would lead to a 'slow death' of an economy within the euro area, similar to the slow death that has been experienced by many regions within individual countries," Moody's said.
Moody’s recently downgraded Greece’s credit rating and gave Portugal a negative outlook.
Greek Prime Minister George Papandreou has promised to bring the budget deficit down to EU limits and said there is no possibility of Greece exiting the euro.
But experts remain concerned.
“The crisis of credibility continues,” Stratis Polychroneas, head of bond research at Solidus Securities, told The Wall Street Journal.
“We are starting to see a new round of investors liquidating positions.”
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