Jean-Claude Trichet, president of the European Central Bank, has reiterated his call for eurozone governments to adhere strictly to their deficit reduction plans and to pursue structural reform but has said the region’s economic recovery has accelerated and is “on track”.
Mr Trichet, speaking in Madrid, declined to comment directly on the inability of eurozone governments to agree how to tackle the sovereign debt crisis that has affected peripheral economies such as Spain,
Ireland and Portugal.
Spain’s finance minister said on Friday that the country’s aim of reducing its budget deficit to 6 per cent of gross domestic product next year was “unconditional”.
Elena Salgado’s comments in a radio interview were the latest official attempt to soothe financial markets concerned about the
debts of “peripheral” eurozone countries such as Ireland, Portugal and Spain and their banking systems.
She acknowledged that Spain could be paying about 5 per cent interest for forthcoming debt issues, compared with an average of 3.6 per cent for its outstanding obligations, but insisted this was not alarming.
Spain has “over-issued” in recent months to give itself a cushion of cash reserves of €20bn or more, is benefiting from historically low global interest rates and is so far on track to cut its budget deficit to 9.3 per cent of GDP this year from 11.1 per cent in 2009.
It has also announced an array of
austerity measures and privatisation plans to convince bond investors that there is no risk of a deficit overshoot or a sovereign default.
But the spreads between Spanish and German bonds, a sign of the higher perceived risk of Spain, have crept up over the past week to reach 245 basis points on Friday.
Even Italy, which has a moderate budget deficit but a high level of accumulated public debt, is now regarded as vulnerable by some analysts. According to Capital Economics, the Italian government might need to borrow more than €330bn ($440bn) next year.
“We still think that the government may eventually need international financial support and might even default,” wrote Ben May, European economist.
Investors and analysts, meanwhile, are shifting their attention from public debt to the fragility of the eurozone’s banking systems.
The
European Central Bank warned on Thursday that eurozone banks could face problems in refinancing €1,000bn of debt due over the next two years, partly because of “crowding out” by cash-strapped governments also tapping the bond markets.
Analysts at Germany’s Commerzbank forecast on Friday that
peripheral bond spreads could fall in the weeks ahead, with states reluctant to issue debt at such high rates and the ECB supporting the market with increased purchases of peripheral bonds,
although they foresaw a renewed crisis by the second quarter of next year.
