Despite Greece's 2011 austerity budget, a financial chill deepens in Europe

As an unseasonable freeze settles over much of Europe, even the Continent's balmier southern climates are suffering. But their freeze relates to cash, not the cold.

Greece, the longest suffering of Europe's so-called PIGS – Portugal, Ireland, Italy, Greece, and Spain – approved an austere 2011 budget early Thursday that's in line with conditions imposed on it in exchange for a European Union and International Monetary Fund (IMF) bailout.

The budget aims to reduce the annual Greek deficit to 7.4 percent of gross domestic product (GDP) from the current level of 9.4 percent. Greek officials say they're taking control of matters, and that markets will soon start to recognize it.

Perhaps. But despite bailouts for Greece and Ireland and efforts to trim public debt in Spain and Portugal to stave off a financial implosion, EU moves to stabilize the weaker EU economies are doing little to satisfy investors.

Portugal had its credit rating downgraded Thursday by the Fitch ratings agency over concerns about the country's ability to refinance government debt. The agency reduced its rating from AA- to A+, saying that Portugal's government and its banks are finding it harder to borrow, a situation almost identical to that which saw Ireland turn to the European Central Bank and IMF for a bailout earlier this year.

Also this week Kathrin Muehlbronner of competing rating agency Moody’s told Portuguese business newspaper Jornal de Negócios it was likely to downgrade the country’s A1 rating by one or two notches.

“The Portuguese banking system is out of the market and if it is necessary to strengthen capital ratios (it may require) injections of public funds for banks to reenter the market,” she told the newspaper. “Moreover, the financing costs of the Portuguese state remain high.”

In Greece, unemployment remains high and the cuts in public spending are deeply unpopular, particularly among the country's powerful public sector unions. Athens daily Ta Nea says in 2011 “the government will return to face a mountain of problems,” which will include the deregulation of a number of protected industries.

Sections of the Greek public are clearly unimpressed. Transport unions are on strike, causing trains and air travel to come to a standstill. Earlier this month, police fought battles with angry anarchist youths commemorating the 2008 killing of protestor Alexandros Grigoropoulos.

Ireland, now routinely lumped-in with “southern Europe," often a pejorative term as much as a geographic one, passed its own austere budget on Dec. 7, complete with both tax hikes and cuts to public services, a combination guaranteed to please no one – other than the IMF.

The European Central Bank-IMF bailout in Ireland was designed to stop the problem from spreading to Portugal and Spain. But access to credit is still tightening in Ireland. Moody’s last week cut Ireland's credit rating by five notches to Baa1, the third lowest investment grade.

Economist Constantin Gurdgiev at Ireland’s Trinity College Dublin, says the enduring crises in the eurozone demonstrates a clear pattern: The markets are not satisfied.

“The week started with the European Central Bank liquidity auction which was oversubscribed. There is a tension in the markets, they’re watching the peripherals [countries such as Portugal, Greece, and Ireland]. You’d expect a slowing in activity coming up to Christmas but that’s not what’s happening. I think we’re going to see a very tough January,” he says.

Mr. Gurdgiev also notes that concern over “contagion” – the threat posed to stronger EU economies by problems in weaker ones – has not gone away.

“Whatever the EU is putting together, there is a sense [that] the market doesn’t believe it will solve the liquidity problem. There is also growing concern about German, French, and Belgian exposures, and indeed their own economies,” he says.