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“Euro Zone Periphery Hammered As Default Fears Rise”
by Reuters   
December 1st, 2010

BRUSSELS  - The euro zone's debt crisis deepened on Tuesday, with investors pushing the single currency lower and the spreads on peripheral bonds up to new highs amid concern weak member states may ultimately be forced to default.

European policymakers came out in force to try to calm markets, with European Central Bank President Jean-Claude Trichet warning that pundits were underestimating the determination of governments to keep the euro zone stable.

But markets paid little attention, pressuring Portugal, Spain and Italy only days after the EU agreed to an 85 billion euro ($110.7 billion) bailout for Ireland.

The borrowing costs of countries like Belgium and France also rose as investors looked beyond the euro zone periphery and targeted core founding members of the bloc.

"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."

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.

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.

Trichet, speaking at a European Parliament hearing in Brussels, said the bloc needed to regain its sense of direction and move toward a "quasi budget federation" to address concerns about fiscal and economic imbalances.

EURO HIT, SPREADS WIDEN

The euro fell for a third straight day, dipping to a 10-week low of $1.2969 before paring its losses to trade above $1.30 in late European trading. The currency has lost over 7 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 were 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. S&P declined to comment.

Italian officials also scrambled to play down the threat to their economy, the euro zone's third largest, which some economists have labeled "too big to bail."

"Italy's public finances are sound, we are not among the countries at risk," said Treasury Undersecretary Luigi Casero.

Weakened governments in Italy, Ireland and Portugal have deepened the sense of crisis by sowing doubts among investors about their ability to act swiftly and decisively to bring their debt and deficits under control.

Portugal's central bank warned on Tuesday that its country's banks faced an "intolerable risk" if the government in Lisbon failed to consolidate public finances.

The minority Socialist government in Portugal approved an austerity budget for 2011 last week, but is struggling to meet its targets for deficit reduction.

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