Euro zone periphery hammered as default fears rise

Posted: November 30, 2010 in Europe, Financial, Government, Man-made disasters
Tags: , , , , , ,

Reuters online 30 Nov 2010

“Sovereign default fears could soon extend to Japan and the United States…” (Bette: The US stock market fell today partly on fears about the Eurozone crisis.)

LISBON/DUBLIN (Reuters) – The euro zone’s debt crisis deepened on Tuesday, with investors pushing the risk premium on Spanish and Italian government bonds to euro lifetime highs amid concern weaker member states may ultimately be forced to default.

European policymakers appeared at a loss to calm markets hell-bent on testing their determination to rescue countries like Portugal and Spain after approving an 85 billion euro ($110.7 billion) bailout for Ireland at the weekend.

The borrowing costs of countries like Belgium and France also rose — and the euro hit a 2-1/2 month low versus the dollar — as investors looked beyond the so-called euro periphery and targeted core founding members of the bloc.

A Reuters survey of 55 leading fund management houses showed U.S. and UK investors had significantly cut back their exposure to euro zone bonds this month, piling into equities instead despite a weakening in global shares.

“The crisis of confidence in Europe can’t be resolved quickly,” said Rick Meckler, president of investment firm LibertyView Capital Management in New York. “No single event can put things back in order.”

Markets are already discounting an eventual rescue of Portugal although the government in Lisbon denies, as Irish leaders initially did, that the country needs outside aid.

While a Portuguese rescue would be manageable, assistance for its larger neighbor Spain would sorely test EU resources, raise deeper questions about the integrity of the 12-year old currency area, and possibly spread contagion beyond Europe.

Citigroup Chief Economist Willem Buiter described the turbulence hitting the euro zone as an “opening act” and predicted that sovereign default fears could soon extend to Japan and the United States. “There is no such thing as an absolutely safe sovereign,” he wrote in a research note.

EURO SLIDES, SPREADS WIDEN

The euro fell as low as $1.2969 and has shed nearly 8 percent of its value against the dollar this month.

The yield spreads of 10-year Spanish, Italian and Belgian bonds over German benchmarks spiked to their highest levels since the birth of the euro in January 1999 and the cost of protecting against a euro zone sovereign default surged.

Jitters also hit European banking shares, which fell 1.2 percent, led lower by French banks BNP Paribas, Societe Generale and Credit Agricole on market rumors Standard & Poor’s might cut France’s outlook.

“There is no reason for concern, no risk,” said Francois Baroin, France’s budget minister and government spokesman.

Italian officials also scrambled to play down the risks for their economy, the euro zone’s third largest, which some economists have labeled “too big to bail.”

http://reut.rs/elr387

For more on the Eurozone crisis: http://www.reuters.com/subjects/euro-zone

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What is the Eurozone? From Wikipedia:

The eurozone, officially the euro area, is an economic and monetary union (EMU) of 16 European Union (EU) member states which have adopted the euro currency as their sole legal tender. It currently consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Eight (not including Sweden, which has a de facto opt out) other states are obliged to join the zone once they fulfill the strict entry criteria.

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