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European markets sink as Germany warns of 'serious situation' for euro

November 23, 2010 | 11:33 am

On a bad day for markets worldwide, the euro is getting trashed as investors and traders take a dim view of the European Union’s planned bailout of Ireland -- fearing that it’s just a prelude to bailouts of other financially weak countries on the continent, and perhaps a grave threat to the euro itself.

German Chancellor Angela Merkel has stirred the pot by warning in a speech that "we're in an extraordinarily serious situation, as far as the situation of the euro is concerned."

Merkel The common currency has plunged to an eight-week low of $1.338 from $1.362 on Monday, a 1.8% loss for the session.

Nobody’s talking about a “weak dollar” now.

The heightened fear level also is showing up in European stock markets, which fell sharply Tuesday for a second straight session. The Spanish market dived 3.1% after falling 2.7% on Monday. Portugal’s market dropped 2.2% after a 1.3% slide on Monday. In Italy stocks lost 2.1% after dropping 1.9% the previous day.

(By contrast, the U.S. market’s losses were far smaller Tuesday, despite the military conflict between North Korea and South Korea.)

Germany has previously raised the prospect that investors in bonds of financially troubled European states must at some point share the pain of any bailouts by the rest of the euro zone. But that clearly does nothing to strengthen investors’ conviction about buying and holding those bonds now.

Even as talks about Ireland’s bailout continued, the yield on two-year Irish bonds jumped to 5.32% on Tuesday from 4.84% on Monday. Yields also rose on Portuguese, Italian and Spanish bonds. The Spanish two-year yield rose to 3.22% from 2.99%, nearing the spring peak of 3.28% set after Greece’s bailout.

Germany’s Merkel is standing on principle, even as others warn that she risks further destabilizing markets.

From Bloomberg News:

Speaking in Berlin, [Merkel] said while she didn’t want to “paint a dramatic picture,” it would have been hard a year ago to “imagine the debate” now taking place in Europe. The German leader is stressing the threat to the euro posed by indebted member countries and is pushing German plans to make investors help pay for any future crisis in the currency area.

“I won’t let up on this because otherwise that primacy of politics over finance can’t be enforced,” Merkel said. “It remains our task to keep calling for tough measures and tough conditions, but also to express clear support for the euro.”

Merkel’s stance has drawn opposition from European Central Bank President Jean-Claude Trichet and leaders in Spain and Greece, who say it risks derailing euro-area nations’ deficit-cutting efforts.

“It’s a thin line she has to walk between keeping control of the discussion with the other governments to get the crisis resolution mechanism, while not stirring further uncertainty, speculation and contagion in the markets,” said Carsten Brzeski, an economist at ING Group in Brussels

-- Tom Petruno

Photo: German Chancellor Angela Merkel. Credit: Odd Andersen / AFP / Gettty Images