Worry in Europe sweeps into more secure countries

interns Contributor
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LONDON — Fears among European bondholders spread Tuesday from the weakest members of the euro zone to other countries, including Italy and Belgium, spurring a stepped-up search for a solution to a crisis that is increasingly putting political as well as financial strain on Europe’s decade-old monetary union.

Reflecting those worries, the euro slipped to $1.3008 at midafternoon in the United States from $1.3125 late Monday. As recently as Nov. 5, the euro traded above $1.40.

Despite the commitment of 200 billion euros, or $260 billion, in bailout funds to Europe’s two most stricken nations — Greece and Ireland — institutional investors were unimpressed with the rescue effort this weekend of Ireland and continued to sell bond holdings in the weaker euro-zone economies.

But what is worse for the European Union and an increasingly stretched International Monetary Fund is that investors have begun to disgorge some of their positions in Belgium, Italy and even Germany.

Even as the yields on the 10-year bonds of Greece, Ireland, Portugal and Spain ended trading Tuesday off their highs for the day, attention in Brussels turned to the rise on Italian sovereign debt to 4.64 percent, of Belgian bonds to 3.97 percent and the recent increase of German bonds, the European benchmark, which at 2.67 percent were down from Monday but well above the 2.1 percent of last summer. Rising yields reflect increased risk in the eyes of investors as well as inflationary expectations. Not that anyone expects Germany, by far Europe’s most powerful economy, to come close to defaulting on its debt. And neither Italy nor Belgium is considered in the same boat as Greece, Ireland and Portugal, since their deficits are lower and they borrow primarily from domestic lenders. Instead, the fear is that Europe’s strategy so far — painfully drawn out step-by-step bailouts of Greece and Ireland — has failed to impress the markets and that the burden to finance even larger rescues for Spain and perhaps even Italy would be too much for Germany to bear, both financially and politically.

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