THE Greek debt crisis has spread to Spain and Portugal in a dangerous escalation as global markets test whether Europe is willing to shore up monetary union with muscle rather than mere words.

Julian Callow from Barclays Capital said the European Union might need to invoke emergency treaty powers to halt the contagion by issuing an EU guarantee for Greek debt. "If not contained, this could result in a 'Lehman-style' tsunami spreading across much of the EU," he said.

Credit default swaps measuring bankruptcy risk on Portuguese debt surged 28 basis points on Thursday to a record 222 on reports that Jose Socrates was about to resign as prime minister after failing to secure enough votes in parliament to carry out austerity measures.

Parliament minister Jorge Lacao said the political dispute had raised fears that the country was no longer governable. "What is at stake is the credibility of the Portuguese state," he said.

Portugal has been in crisis since the Maoist-Trotskyist bloc won 10 per cent of the vote last year. This is rapidly turning into a market crisis as well as investors digest a revised budget deficit of 9.3 per cent of gross domestic product for 2009, much higher than expected. A €500 million ($791 million) debt auction failed on Wednesday. The yield spread on 10-year Portuguese bonds has risen to 155 basis points over German bunds.