The European Central Bank said last week that it considers Malta among the eight “high risk countries” in the eurozone.

The monthly ECB bulletin lists Malta along with Cyprus, Greece, Ireland, The Netherlands, Slovakia, Slovenia and Spain, as “high risk” countries.

Only Finland is considered “low risk”, while Austria, Belgium, France, Germany, Italy, Luxembourg and Portugal are considered “medium risk”.

Malta has moved from being assessed as “medium risk” in 2006 to “high risk” in 2009.

The ECB classification considers the sustainability of public finances. In an explanatory note, it says: “Compared with the 2006 Sustainability Report, mainly owing to the deterioration in their current budgetary positions, Ireland, Spain, Malta, The Netherlands, Austria and Slovakia have been grouped into a higher risk category.”

It adds: “As indicated in the table, the underlying quantitative determinants of the identified sustainability gaps, i.e. the gaps arising from the initial budgetary position and from the projected rise in ageing costs, differ significantly across the euro area countries. The table also shows that to stabilise the debt ratio, the current structural primary balance may require a large adjustment, amounting to more than eight percentage points of GDP. In turn, the adjustment of the structural primary balance needed to address projected increases in age-related expenditure may reach almost 13 percentage points of GDP.”

In other words, to stabilise the deficit to GDP, Greece needs a correction of 14 per cent and Ireland of 15 per cent while Malta needs a correction of seven per cent.

The ECB warned on Thursday that the overall direction of eurozone public debt levels is unsustainable and disclaimed any responsibility for supporting profligate member states.

“The high deficits of countries such as Greece, Ireland and Spain are a reason for concern to us,” said ECB governing council member Ewald Nowotny. “It’s not the ECB’s job to help defuse these situations.”

German Chancellor Angela Merkel hinted on Thursday that healthier members of the eurozone are not prepared to abandon Greece and the other heavily indebted countries in the currency bloc.

“What happens in a member country influences all the others, particularly when you have a common currency,” Merkel said after a meeting of the centre-right European Peoples’ Party in Bonn.

Merkel’s comments countered a growing sense of unease in the bond market that Greece, which angered its partners in the European Union with a massive upward revision to its budget deficit only a few weeks ago, might be left to default by an EU no longer prepared to tolerate the country’s chronic deficits.

European monetary officials sparked those fears earlier on Thursday by issuing fresh warnings about the dangers of unsustainable public debt and deficits, but markets later took comfort from emerging signs of support for Greece, whose problems had sparked a widespread sell-off in euro debt markets earlier this week.

Similar concerns had spread in the debt markets to other countries perceived to have weak public finances, such as Ireland, Portugal and Spain.

ECB President Jean-Claude Trichet had been only marginally more reassuring, telling Belgian newspaper L’Echo that he is “confident that the Greek government will take the necessary and courageous measures”, but repeating his concerns about “the severity of the situation”.

In its monthly bulletin for December, the ECB warned that eurozone governments, which have funded record deficits at historically low interest rates this year, could face much worse conditions next year.

“While financial market conditions for sovereign debt issuance have recently been relatively benign, this cannot be taken for granted,” it said. “The very large government borrowing requirements carry the risk of triggering rapid changes in market sentiment.

“This could happen, in particular, if market participants were to perceive policies as failing to address the challenges to fiscal sustainability,” the bank continued.

The comments were an uncomfortable reminder of long-standing concerns about Europe’s ability to service a stubbornly large debt burden in a future that looks likely to be characterised by low growth and aging, or even declining, populations.

Two months ago, the European Commission assessed Ireland, Greece, Spain, the Netherlands, Malta, Cyprus, Slovenia and Slovakia as “high-risk” in regard to the sustainability of their public finances. At the time, markets had largely shrugged off that news, preferring to be guided by international credit ratings agencies and reassured by the continued supply of ultra-cheap credit from the ECB.

However, since then, Fitch Ratings Agency and Standard & Poor’s have downgraded Greek debt, and lowered Spain’s outlook to negative.

To make matters worse, the ECB said last week that it will no longer provide unlimited six or 12-month funds at a fixed one per cent after March next year, a sign interpreted by markets as ending the phase of ultra-loose monetary policy that tided the banking sector over the rocky period after the financial crisis.

http://www.ecb.int/pub/pdf/mobu/mb200912en.pdf