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.

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.

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."

"There's still an element of panic, partly about the integrity of the European banking system – which isn't just about Italy and Greece – but also because investors are not certain these new governments will be able to solve the problem," he says.

Mr. Mangus, the UBS economist, suggests bolder measures are necessary to calm investors. Such measures could include: the ECB providing a so-called "backstop" guarantee, including by acting as lender of last resort to Italy – a creditor to be counted on even if the country defaulted on its debts; German agreement on the issuing of shared eurobonds, and "hard and fast" proposals on eurozone fiscal integration.

EU turns to Asian investors for help

This week's big bond sell-off comes just days after analysts raised worries that the EU bailout fund, known as the European Financial Stability Facility (EFSF), was failing to woo sufficient interest from Asian investors. The EFSF is charged with issuing bonds to fund the "bailout  countries" of Ireland, Portugal, and Greece.
 
Speaking on a trip to Beijing on Oct. 28, EFSF chief executive Klaus Regling said China was a "good, loyal investor" in eurozone bonds but his upbeat account of Chinese appetite for European debt now seems to have been overstated.
 
"If you were an Asian sovereign wealth fund, would you put money into any European investment other than in Finland, the Netherlands, Germany, and Austria?" asks Irish economist Brian M. Lucey.
 
Mr. Lucey, based at Trinity College Dublin, says the €3 billion EFSF auction of 10-year bonds in support of Ireland, held on Nov. 7, was met with tepid demand, indicating a loss of faith in the EU's ability to put a lid on the crisis.

"That's great lads, only another 997 billion to go," he says, referring to a €1 trillion goal envisioned for the bailout fund. "On average, 40 percent of EFSF funds raised have been from Asian investors, but the last sale saw only 20 percent."