Eoin Treacy's view European government bond spreads over German bunds began to expand during the credit crisis in 2008. The various debt problems which have plagued the region are now well understood. The equanimity that prevailed before 2008 is no longer workable in the absence of a coherent central fiscal policy. Therefore markets are attempting to find a price at which each country's bonds can be considered to reflect their individual merits.

The International Swaps and Derivatives Association ruled, counter intuitively, that the voluntary debt swap which forms part of the proposed Greek bailout does not constitute a default. Therefore CDS contracts will not pay out. However since the bailout is to be put to a plebiscite, the possibility of an outright default has resurfaced. I believe government bonds spreads offer the best indication of how risk is being priced.

Greek spreads paused above 2000 basis points from late September but today's announcement that the recent bailout is to be put to a referendum has increased selling pressure and the spread has widened even further.

Portuguese spreads have paused in the region of 1000 basis points since July but held a progression of rising reaction lows and a sustained move below 900 basis points would be required to indicate a moderation of the risk premium attached to this market.

Irish spreads, alone among the peripheral nations, have almost halved over the last few months, They stabilised near 600 basis points but the current state of heightened anxiety suggest they are more likely than not to expand.

Italian spreads have overtaken those of Spain over the last two months and are rallying towards the pre-convergence peak near 500 basis points. A sustained move below 375 basis points would be required to check upside momentum.

Spanish spreads continue to trend consistently higher and are approaching the pre-convergence peak near 400 basis points. A break in the progression of higher reaction lows, currently near 300 basis points, would be required to question current scope for additional upside.

Widening risk premia are not confined to peripheral countries. Belgian spreads broke upwards again last week and are now close to 250 basis points which is substantially above their pre-convergence peaks. French spreads also hit a new peak today of 123 basis points.

The acquiescence of the Greek public to increasingly harsh rounds of austerity, however justified, cannot simply be taken for granted. Given the uncertainty that comes with putting the bailout agreement to a vote, Prime Minister Papandreou's position must have been tenuous indeed for him to choose that option. The optimism that a conclusive line was being drawn under the crisis has therefore been at best delayed. In the meantime, markets can be expected to reassess upside potential.