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Europe debt crisis spreads to stronger economies

Yesterday, investors began dumping bonds, even in stronger economies like Austria and Finland. The sell-off shows a need for bolder solutions to the European debt crisis, say some.

By Correspondent / November 16, 2011

A man wears an advertising banner in Milan, Italy, Wednesday. Investors ratcheted up the pressure on Europe on Wednesday, driving up the interest rates countries pay to borrow money and dumping stocks amid continuing unease over the Europe debt crisis.

Luca Bruno/AP

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Dublin, Ireland

Just days ago, Greece and Italy's new governments were hailed as the solution to the European debt crisis, but markets have instead responded with more turmoil.

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Observers characterize the phenomenon as a "contagion" that has now spread well beyond Europe's weaker economies.

They say the trend suggests that no economy is immune to the crisis – and that the EU may need to consider bolder solutions, particularly given its failure to persuade Asian investors to come to the rescue.

George Mangus, a senior economist at Swiss bank UBS, warns of a "very sour mood" among investors when it comes to the political measures proposed to contain the crisis. Yesterday, the crunch began to hit the stronger economies of Belgium and France and, most worrying, the Netherlands, Austria, and Finland, with investors taking flight and selling the countries' triple A-rated bonds.

"Incremental change is not seen as enough. Confidence requires a sizable response, not just making citizens 'take their [austerity] medicine,' " says Mr. Mangus. "Nothing short of a total transformation of the eurozone bond market is enough."

'Self-reinforcing panic'

Bonds are crucial to the health of national economies, because they provide a means for governments to finance their spending. As yields on the bonds rise, the more expensive it becomes for governments to borrow that money – and thus high bond yields can add an unbearable burden to countries already struggling with extensive debt and low – even negative – economic growth.

So far, the EU has been unable to calm the markets. Italy's borrowing costs have now risen above 7 percent, a level considered unsustainable, while yields also rose in countries like Austria – a country not seen as part of the "usual suspects" group when it comes to debt concerns.
 
All this despite the European Central Bank (ECB) buying around €1 billion worth of eurozone bonds daily.
 
"There's a self-reinforcing panic about the whole thing," says finance analyst Daniel Ben-Ami, author of the book "Ferraris for All: In Defence of Economic Progress."

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