Spanish and Portuguese leaders struggled to soothe nervous investors on Friday and limit the loss of confidence that has spread across southern Europe from the financial crisis in Greece.

Only last week, José Sócrates, Portugal’s socialist prime minister, approvingly quoted Paul Krugman, the Nobel prizewinning US economist for his comment that “deficits saved the world”. If governments do not run up deficits during a recession, Mr Sócrates said, they were not doing their job.

Julian Callow from Barclays Capital said the EU may to need to invoke emergency treaty powers under Article 122 to halt the contagion, issuing an EU guarantee for Greek debt. “If not contained, this could result in a `Lehman-style’ tsunami spreading across much of the EU.”