ANALYSIS - Debt risk to drive euro zone fiscal crackdown

By Paul Taylor

PARIS (Reuters) - The bond market vigilantes are back on the prowl in Europe.

A first frisson of market anxiety about sovereign debt risk in peripheral euro zone countries early in the financial crisis faded after Germany made clear that any euro state that got into serious payments difficulties could count on help.

Now a second wave of concern is starting to wash over Europe as some governments -- especially Greece -- face abysmal budget deficits and ballooning debts due to revenue shortfalls and the cost of coping with the crisis.

"There is evidence that financial markets are increasingly sensitive to country-specific solvency concerns," Silvia Sgherri and Edda Zoli, European economists at the International Monetary Fund, wrote in a paper for the economics website Vox.

They identified four factors in the risk premium charged by investors for holding the debt of euro zone states: the solvency of each country's financial sector; the projected increase in national debt; the economic outlook and liquidity expectations and the general level of risk aversion in global markets.

Bond traders began to speculate on a sovereign default or a possible break-up of the 16-nation zone earlier this year, betting against the debt of a group of countries that some branded the PIGS -- Portugal, Ireland, Italy, Greece and Spain.

Peer Steinbrueck, German Finance Minister at the time, calmed market jitters in February by declaring: "If it came to a serious situation, all of the euro zone countries would have to help."

His comment was seen as a lifeline for Ireland, which was battling a banking and real estate meltdown.