Both Ireland and Portugal saw the cost of their debt shoot up last week amid fears they might be forced to seek bailouts or even default, as Germany pushed for private lenders to contribute to future rescue packages.
“Some have suggested, such as the German government, that markets and banks that financed nations with high debts, should be prepared to take the cost of a possible default,” Papandreou told reporters in Paris.
“That created a spiral of higher interest rates for the countries which seem in a difficult position such as Ireland and Portugal,” he added, even as Greece’s own massive debt came under renewed pressure.
“This could be a self-fulfilling prophecy. It’s like saying to someone: ‘Since you have a difficulty, I will put an even higher burden on your back.’ But this could break your back,” he charged.
Portugal and Ireland are struggling with burgeoning public debt and deficit levels and as a result have had to pay ever higher returns to bond buyers in order to raise funds.
Finance ministers from the 16 members of the eurozone single currency bloc are due to meet in Brussels on Tuesday for scheduled talks that are expected to focus heavily on the situation in Ireland and other big debtors.
Ireland is under pressure from some quarters to accept European Union aid to help it through its bad patch without further destabilising the currency.
European leaders agreed at a summit last month to discuss in December the issue of a permanent mechanism to replace the €440-billion ($607-billion) European Financial Stability Fund that expires in 2013.
Berlin is pushing for a procedure to be drawn up in case a eurozone country goes bankrupt, insisting that bondholders should take their share of the costs rather than the public picking up the tab.
While this future provision would not change the EU member’s commitment to the existing crisis fund, Germany’s position sent tremors through the bond markets, contributing to pressure on Ireland’s bond yields.
For his part, Papandreou said the long-term debt problems of EU member states exist because of a “lack of democratic control” on financial markets, and called the campaign for tighter regulation a “battle for civilization.”