The president of the European Central Bank yesterday pleaded with European Union governments to put their finances in better order amid mounting fears that the eurozone's sovereign debt crisis is on the verge of breaking out once more.
Jean-Claude Trichet said eurozone leaders needed to be much more aggressive about reducing their deficits and called for much tougher rules and penalties to bring recalcitrant nations to book.
"The European governments have to fulfil their duties in full: monetary policy cannot substitute for government irresponsibility," Mr Trichet said. "Europe cannot afford to rest halfway. We need to be more ambitious. The proposals we have seen in Brussels do not go far enough in the ECB's view."
The ECB has been campaigning for stronger penalties for those countries which breach EU borrowing rules by running up excessive deficits, but was disappointed in the autumn when a political row saw EU heads of state agree on much weaker sanctions than it had hoped for.
Central bankers fear the failure of the EU – and particularly members of the single currency zone – to send out a tougher message about fiscal responsibility in the wake of a period during which most countries have breached the bloc's rules on borrowing, is adding to nervousness in the bond markets.
Speculation is already rising that more countries may need Greece and Ireland-style bail-outs in order to prevent a default on debt repayments. In particular, the yields on Portuguese sovereign bonds have risen sharply over the past three days, peaking at 7.03 per cent on 10-year debt yesterday, a rise of half a percentage point in a single day.
Although Portugal's government insists it is not in need of assistance, with Prime Minister Jose Socrates now claiming that spending last year was actually lower than anticipated, there is widespread scepticism about its ability to avoid a bail-out. Rumours swept international markets yesterday that some banks were no longer prepared to accept Portuguese government bonds as collateral against lending.
The simmering tensions could come to the boil as soon as Wednesday next week, when Portugal hopes to raise up to €1.25bn through a bond issue. Any failure to get the auction away would trigger a new panic about the ability of the EU's most indebted nations to stay on top of their borrowings. And while Portugal is a relatively minor eurozone member in economic terms, accounting for just 2 per cent of the bloc's GDP, turmoil could trigger a crisis in its next-door neighbour Spain, which would be much harder to contain.
Analysts fear a new bout of nerve-jangling across European debt markets is now inevitable. Thomas Mayer, the chief economist at Deutsche Bank, said: "The euro crisis had a Christmas break, but it is back with the new quarter."
The anxiety was heightened yesterday by official data revealing that the eurozone's economic recovery during the second half of last year had not been as strong as previously thought. The eurozone economy grew by 0.3 per cent during the third quarter of 2010, the EU said, rather than 0.4 per cent as it had previously recorded.
The fragility of the economic recovery in some parts of Europe willincrease the chances of a split in the eurozone between stronger and weaker members. In contrast to the fears for Portugal's bond issue, both Germany and France have seen strongdemand for their debt in auctions in recent days, although even the French are now paying more to borrow from the markets.Reuse content