Lawmakers in Portugal have backed an austerity plan to restore the country’s battered public finances.
The minority Socialist government and the opposition Social Democrats agreed on measures to ease the country’s huge debts.
Investors fear Portugal could follow Greece into a deeper financial crisis.
Portugal’s finance minister said the vote was key to restoring credibility with the markets.
“On the basis of these measures we’ll be able, not only to correct our public finances, but also to pursue several measures that will be decisive in restoring the competitiveness of the Portuguese economy,” said Fernando Teixeira dos Santos.
Plans include slashing welfare benefits, reducing military spending and freezing public sector pay.
Portugal’s debt currently stands at 9.3 per cent of GDP – three times what is allowed under EU rules.
The government aims to cut that figure to 2.8 per cent by 2013.
European Central Bank President Jean Claude Trichet hailed the vote as “important decision” taken by Portugal, in particular the move to freeze salaries for civil servants.
The Portuguese government predicts the economy will grow by just one per cent this year. Observers have said without spending cuts the country could struggle to pay off its debts.
Credit rating agency Fitch voiced those fears on Wednesday by downgrading Portugal’s sovereign debt rating from AA to AA-.