By NEIL SHAH

The European Central Bank's extraordinary policy of buying government bonds has eased the financial pressure on Europe's weaker economies, but the fear of possible sovereign-debt defaults still hangs over the financial markets.

This week, Ireland and Spain have bond sales planned that will provide a closely watched test for the ECB's emergency measures.

The ECB started buying the bonds of Greece, Ireland, Portugal, Spain and Italy last Monday after a sudden market seizure sent Portugal's borrowing costs soaring and sparked fears that Greece's debt troubles were spreading to other weak euro-zone economies. While official details aren't available, the ECB is estimated to have bought €7 billion ($8.67 billion) of government debt Monday and then reduced its purchases through the week, to €2 billion Thursday, according to analysts at Dutch bank ING Groep NV.

Despite Friday's market tumult, the borrowing picture for strained euro-zone countries has improved since the ECB emergency plan went into effect last week. The extra premium Portugal has to give investors to buy its bonds instead of ultra-safe German bunds has dropped significantly to about two percentage points on Friday, evidence that investors' fears have receded. On Thursday, Italy raised €5 billion by selling bonds to private investors, another sign of easing tensions in the bond market. Portugal had a successful bond sale a day earlier.

But such improvements may turn out to be short-lived, analysts warn, forcing the ECB to continue buying bonds to prop up markets until more private investors return. That, in turn, could have serious long-term consequences, making investors wary of buying bonds for fear that the ECB's bond buying could stoke higher inflation or further undermine the already weak euro. Indeed, the ECB's experimental bond purchases may have inadvertently raised the stakes in a dangerous game of chicken between markets and governments.

"The market has developed a habit of demanding more, no matter how much has been delivered," says Georg Grodzki, an analyst at fund manager Legal & General Investment Management in London, who says the ECB is simply postponing countries' debt troubles and eroding its own credibility in the process.

Debt-laden Portugal and Italy might beg to differ: After watching its borrowing rates soar several days ago, Portugal sold €1 billion of new bonds last Wednesday, paying an average interest rate of 4.52% for investors' cash, slightly lower than the 4.55% interest rate in the broader market.

A day later, Italy, considered the strongest of Europe's fringe borrowers, sold €5 billion of bonds, with demand outstripping the bonds available for sale. And for much of last week, the borrowing costs of euro-zone governments fell dramatically, while investors were much less nervous about European debt defaults. That chopped down the cost of insurance against government debt defaults.

But while a financial-market panic may have been averted, investors are still worried that Greece and some of its debt-laden peers will fail to push through the severe fiscal reforms needed to fix their deficits. Social unrest, especially in Greece, is a major concern. Ultimately, Greece and others may simply have to renegotiate their debts anyway, which would mean major losses, especially for European banks that hold a lot of Greek debt, analysts say.

One sign of lingering worries: The difference between what weaker euro countries and Germany have to pay to borrow—a key signal of market risk—has dropped but remains higher than it was only a month ago. Meanwhile, European firms needing to refinance their own debts stayed largely on the sidelines last week even as stocks briefly jumped higher. And the rates that banks charge each other in money markets remained on an upward trend, suggesting worries about the banking system persist.

Europe's "aid package buys Greece time, but does nothing to lower its debt burden," analysts at Brown Brothers Harriman said in a note last week. "That's also what the ECB bond purchase plan does, transferring Greek risk from the private banks in Europe to the ECB."

On Friday, the upswing in confidence after the ECB's stunning decision started reversing. In the market for insurance-like contracts called credit-default swaps, it now costs about $611,000 a year to insure $10 million of Greek government bonds for five years, compared with $529,000 on Thursday, according to data provider CMA DataVision. Portugal's insurance cost hit $247,000 Friday from $155,000. Borrowing costs for these countries edged higher again, with Greece's 10-year rate passing 8%.

The big test comes this week, when euro-zone countries from the Netherlands to Germany will try to raise a total between €24 billion and €27 billion by selling new bonds, according to analysts at Italian bank UniCredit. Since the ECB has stayed mum about its bond-buying strategy, how the central bank responds to any market wobbles may offer clues about the extent of its commitment to support markets.

On Tuesday, Ireland's debt managers plan to sell €1 billion to €1.5 billion of debt in an auction widely expected to proceed smoothly. After that auction, Ireland will have already financed roughly 65% of its debt needs for the year, putting it in a relatively strong position, along with Italy, UniCredit says.

The market's biggest test will be Spain, which is likely to sell around €3 billion of debt on Thursday. France, Germany and the Netherlands are also selling debt this week.

The ECB's efforts should keep borrowing costs from jumping, UniCredit analyst Chiara Cremonesi says. However, it is unclear how long the ECB will buy bonds or whether private investors will start supporting, say, Greece or Portugal, again.

That could mean the ECB stays a buyer of last resort in the bond market for longer than it may have intended. Ms. Cremonesi expects the ECB to eventually buy roughly 5% to 10% of the existing bonds of various euro-zone countries, with the exception of Italy, a figure which translates to about €30 billion to €60 billion.

Write to Neil Shah at neil.shah@dowjones.com

Sourced from www.wsj.com