James Saft is a Reuters columnist. The opinions expressed are his own.
Just when it looked like Spain would force the euro zone to get serious about destroying its crippling debts, here comes plucky Belgium, hobbling its way to history.
While some are focusing on whether Portugal will take a bailout (hint: they will) and how to extinguish the burning firewall around Spain, markets are steadily losing confidence in Belgium, which is big enough, ugly enough and heart-and-soul-of-Europe enough to change the game, potentially forcing sovereign defaults and bank recapitalization.
Investors imposed an all-time-high risk premium on Belgian bonds relative to German ones on Monday amid political chaos. Belgium's parties have for the past 212 days been unable to agree a government, forcing King Albert II to step in and ask for a cost-cutting budget for 2011. Gross government debt is very high, hovering around 100 percent of GDP, leaving Belgium very vulnerable to a loss of market confidence.
Given that Portugal is likely to soon apply for help and rising concern about Spain, contagion to Belgium could be the catalyst that forces European authorities to rethink their approach.
This latest round of euro zone risk aversion may have been touched off by a proposal released last week that may mean senior lenders to banks would in future be forced to share in losses in the event of failure, so called "burden sharing." A feature of the sovereign bailouts thus far, notably in Ireland, is that the authorities have refused to force bank senior creditors to share in the pain, no doubt because to do this would be to reveal many banks as insolvent.