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Growing divergence in government bond spreads
The spread between low-risk German government bonds and debt issued by Greece, Ireland, Portugal and Spain widened recently after ratings agency Standard and Poor's cut Greece's rating and warned of a downgrade for the other three countries.
However, the overall figure masked a much more dire situation, with Ireland's deficit, for example, expected to swell to a stunning 13 percent in 2010 and Spain's hitting 5.7 percent the same year.
By coincidence, S and P reduced its rating on Spanish debt on Monday as Almunia spoke, cutting it to AA-plus from a coveted AAA level -- the highest possible and indicating virtually there is no risk of default.
Almunia, himself a Spaniard, said that while the risk of default could never be ruled out, it was next to non-existent for any euro area country.
"Those who have not consolidated their public finances in due time, in good times ... should pay higher spreads. This is an element of market discipline," he said.
Likewise, analyst Ben May at consultants Capital Economics warned that although market talk of default looked "overblown," spreads would only keep widening unless governments convincingly tackle their deficits.
"But looking ahead, a prolonged economic contraction, rising government debt and relatively high government borrowing costs will only raise such concerns (about default) and could even trigger calls for some of these economies to leave the single currency," he warned.
In light of the growing divergence in government bond spreads, Dutch Finance Minister Wouter Bos said that he expected his eurozone counterparts would be discussing the issue.
With government bond spreads growing, Almunia acknowledged that the idea of common issuance of debt by eurozone governments had been revived, along with proposals for group's of euro countries to issue a bond together and some kind of multilateral guarantee of debt raised by euro members.
The spread between low-risk German government bonds and debt issued by Greece, Ireland, Portugal and Spain widened recently after ratings agency Standard and Poor's cut Greece's rating and warned of a downgrade for the other three countries.
However, the overall figure masked a much more dire situation, with Ireland's deficit, for example, expected to swell to a stunning 13 percent in 2010 and Spain's hitting 5.7 percent the same year.
By coincidence, S and P reduced its rating on Spanish debt on Monday as Almunia spoke, cutting it to AA-plus from a coveted AAA level -- the highest possible and indicating virtually there is no risk of default.
Almunia, himself a Spaniard, said that while the risk of default could never be ruled out, it was next to non-existent for any euro area country.
"Those who have not consolidated their public finances in due time, in good times ... should pay higher spreads. This is an element of market discipline," he said.
Likewise, analyst Ben May at consultants Capital Economics warned that although market talk of default looked "overblown," spreads would only keep widening unless governments convincingly tackle their deficits.
"But looking ahead, a prolonged economic contraction, rising government debt and relatively high government borrowing costs will only raise such concerns (about default) and could even trigger calls for some of these economies to leave the single currency," he warned.
In light of the growing divergence in government bond spreads, Dutch Finance Minister Wouter Bos said that he expected his eurozone counterparts would be discussing the issue.
With government bond spreads growing, Almunia acknowledged that the idea of common issuance of debt by eurozone governments had been revived, along with proposals for group's of euro countries to issue a bond together and some kind of multilateral guarantee of debt raised by euro members.
