When the European Union stepped in this spring with a €750 billion ($955 billion) rescue package to back Europe’s weaker economies, the threat of imminent default practically disappeared.
Little of the money has actually been spent, but borrowing costs fell and pressure on the banks that hold much of Europe’s sovereign debt eased.
So where, then, have the bond buyers gone? As Europe’s long summer vacation nears its end, investors appear reluctant to take on additional debt from "peripheral" economies like Spain, Portugal, Ireland and Greece, economists and analysts say.
As a result, spreads — the difference in yields on bonds deemed safe and those with greater risk — are widening.
Funds are gravitating to safer German bunds as well as French and British bonds, where the economic outlook is clearer.
At the same time, recent news reports — like the downgrade of Ireland’s credit rating Wednesday and evidence of renewed intervention in bond markets by the European Central Bank this month — have added to unease about the ability of countries like Spain and Greece to manage their debts over the long run.
"The specter of default is still there for some countries, it has just been displaced to later on," said David Marsh, chairman of the financial advisory firm SCCO International. "The safety net has to be tested."
This net is a complex set of state-backed structures, including the European Financial Stability Facility, set up in Luxembourg in response to the Greek budget crisis this year, which could provide up to €440 billion, or $506 billion, in support.
For investors, these official mechanisms do not seem to have removed the risk of holding bonds in the affected countries, partly because of high price volatility and partly because there is uncertainty about how long the backing will be in place.
The German government wants the Luxembourg fund to lend only at punitive rates, partly because Berlin is worried that Germany’s own top-flight debt rating might be compromised, while troubled borrowers like Ireland and Spain want to avoid at all costs the stigma of borrowing from their neighbors, Mr. Marsh added.
Underlying this is a skepticism about whether politicians, notably in Paris and Berlin, have the will to enact the changes to the structure of the euro zone — either by moving toward fiscal harmonization or a multispeed project — that would be needed to avoid a repetition of this year’s political and economic crisis.
As a result, many investors are only willing to re-enter the market for these assets gingerly, and the rates they require to hold the bonds of the affected countries have climbed back, in some cases close to the highs seen in May.
For example, the yield on the benchmark 10-year Irish bond peaked at 5.865 percent in May before falling. It has since drifted back up and was at 5.478 percent Wednesday.
Meanwhile, some investors fear that a number of countries, having pledged deep spending cuts and revenue-raising steps, may struggle to fulfill their promises, facing pressure from frustrated voters and angry unions.
"Austerity is key and it’s probably only in the third or fourth quarter that you will be able to start assessing how the programs are going," said Theo Phanos, co-founder of Trafalgar Asset Managers in London. "Beyond that, it probably won’t be until 2011 when you have an idea of how far governments are able to maintain reasonable growth alongside austerity."
In particular, there are worries over the tricky political and social battle in Madrid to implement the spending and pension cuts presented in the spring by the Socialist government of José Luis Rodríguez Zapatero, who lacks a parliamentary majority.
Discussions about changing the pension system are continuing between the government and companies on one side and the unions, which have called a general strike for the end of September. Demonstrations against pension changes in France are also planned next month.
Reports last week that quoted the Spanish finance minister, Elena Salgado, as saying that Spain would spend at least €500 million more than initially planned on infrastructure next year brought concerns about how fast that country would be able to lower its deficit.
Antonio Garcia Pascual, an analyst at Barclays Capital in London, said that Madrid needed additional fiscal consolidation measures to reach its goal of reducing the budget deficit to 6 percent of gross domestic product for 2011 and 3 percent in 2013.
The government’s growth projections of 1.3 percent in 2011, 2.5 percent in 2012 and 2.7 percent in 2013 are far too optimistic, he said.
The government "would need to complement the current austerity measures with further cuts in current government spending and investment, as well as with a further increase in VAT rates and excises," he wrote in a research note.
And as Spain restructures its troubled savings banks, many of these lenders remain reliant on the E.C.B. for financing.
More broadly, recent data showed that the E.C.B. bought €338 million in euro-zone government bonds during one week of August, a relatively small amount but well above the €10 million bought during the previous week.
There has also been a string of negative reports from Ireland, where the bill for recapitalizing its tattered banking sector keeps rising, weakening the government’s fiscal flexibility.
On Wednesday, Standard & Poor’s cut Ireland’s sovereign rating by a notch to AA-, still a high investment grade, from AA, with a negative outlook.
The agency, worried by the protracted and expensive bailout of the banks, raised its estimate of the total cost of the rescue to ¤90 billion, equivalent to 58 percent of G.D.P., from ¤80 billion last year.
The recent announcement of new capital injection into Anglo Irish Bank suggests that Ireland’s net government debt will rise toward 113 percent of G.D.P. in 2012, analysts at RBC Capital Markets said.
Analysts are wondering what Ireland is going to do about a government guarantee on the debt of its six biggest financial institutions — one that expires Sept. 28.
There are also doubts about Lisbon’s ability to push through rigorous spending cuts. The budget deficit in the first six months of the year was ¤500 million higher than a year earlier.
The jump largely reflected increased social security spending, caused by higher unemployment, which offset higher weighed down better receipts from value-added and corporate taxes.
"Even though figures are likely to improve in the months ahead: the target announced in May, i.e. reducing the deficit to a ratio of 7.3 percent is still a long way off," said a report from the Commerzbank economists Ralph Solveen and Jörg Krämer. "While reaching the target remains possible, it has become more difficult."
Data on receipts from Italy, Greece and Spain have been more positive.
"Italy and Spain look like they are ahead in their austerity plans but will that mean they under-deliver in 2011?" asked David Schnautz, an interest rate strategist in London for Commerzbank.
He said the recent trend in bond yields — low in the core of Europe, high on the periphery — was partly a "flight to quality" into German bunds.
But the decline in German yields had "caught many investors off guard" as the negative Irish reports were filtering out and as unexpectedly robust second-quarter growth numbers from Germany raised the likelihood of a two-speed recovery in the euro area.
Mr. Phanos, of Trafalgar said, "Sovereign debt’s a buyer’s market." He added, "And natural buyers will tend to hold back and see if yields go a bit higher. It is, of course, not in the interest of issuers."