Financial markets are putting too much pressure on euro zone peripheral states, which will eventually benefit from narrower debt spreads if they continue to redress fiscal imbalances in 2011, a senior IMF official.
"(At the moment) there is too much pessimism about Portugal, Ireland and Greece," Carlo Cottarelli, head of the International Monetary Fund's fiscal affairs department, told Reuters on Friday.
In its twice-yearly "Fiscal Monitor" report on Thursday, the fund said debt-burdened rich nations are beginning to cut back deficits at an appropriate pace, but concerns remain about the economic recovery losing steam.
"If fiscal policies are implemented in an appropriate way, markets will see this. There will be less risks for countries and spreads will narrow gradually," Cottarelli said.
Premiums investors demand to hold 10-year Irish, Greek and Portuguese bonds rather than benchmark German Bunds have risen sharply this week, as a debate over a permanent debt default mechanism for EU states has refocused concerns on the fiscal positions of countries on the eurozone's periphery.
On Friday, the Irish spread hit its highest ever level above 530 basis points as Dublin battled to convince markets it could avert a Greek-style debt meltdown.
Spain's spread reached its highest since July and Italy since September, while Portugal stayed elevated above 400 basis points.
Cottarelli said he could not predict when peripheral spreads would narrow, though 2011 would be a key year for reaping the benefits of fiscal consolidation. "Markets want to see if fiscal policies (started in 2010) are confirmed in 2011. Then spreads could narrow," he said.
"Markets are very volatile and will continue to be: more time is needed before they understand that the adjustments are long-lasting," he said. Peripheral spreads were tightest in Italy because its deficit rose less than others' during the crisis.