Jeremy Warner: Euroland's widening credit spreads

Outlook Portugal yesterday became the latest eurozone country to have its sovereign debt put on negative watch by Standard & Poor's because of a deterioration in the public finances, with Spain, Ireland and Greece having already gone the same way. This is obviously not good for the countries involved, for it means they must pay a little bit more for their borrowings, but it hardly presages a break-up of the euro, as many eurosceptics seem to hope.

Virtually all sovereign nations can get a triple-A rating for their debt if borrowing in their own currency. The problem for all euro nations is that borrowing in euros is like borrowing in a foreign currency, because they have only limited control over the central bank and therefore cannot print money to prevent default.

Yet the higher risk of default in these countries as budget deficits mushroom is more than compensated for by the absence of currency risk. Spreads have widened quite a bit within the eurozone over the last year, but not by nearly as much as they have elsewhere in the world as the credit crunch bites home.

If there was any risk of any of these countries being forced out of the euro, the differential would be much more extreme, so as to reflect a likely collapse in the currency once the prop of the German mark had been removed. Reports of the euro's death are somewhat premature, though some countries will undoubtedly be forced into very considerable reductions in relative living standards to stay the course. If wages cannot be deflated through devaluation, they must be adjusted even more brutally still by direct action.