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Europe's debt troubles deepen as investors flee bonds of Spain, Italy

November 30, 2010 | 11:35 am

The euro slumped further Tuesday and European stock markets slid again as fears continued to mount over the continent’s government-debt crisis.

Ireland’s bailout by the European Union, in a deal formalized over the weekend, already is a distant memory. The markets now are terrorized by the possibility that much bigger euro-zone countries -- Spain, Italy and Belgium -- could be priced out of borrowing in the bond market and forced to seek an EU rescue.

Trichet In trading Tuesday, skittish investors demanded a 3.88% yield to buy Spanish two-year government bonds, up from 3.71% on Monday and 2.78% two weeks ago.

Italian two-year bond yields rose to 2.98% from 2.86% on Monday and 2.33% two weeks ago.

By contrast, the U.S. two-year Treasury note yields just 0.45%.

As faith in Europe’s ability to avoid a deeper crisis continues to evaporate, the euro has tumbled to a new two-month low of $1.30 from $1.31 on Monday. The currency was worth $1.42 on Nov. 4. It’s the speed of the descent that is frightening investors and traders.

European Central Bank President Jean-Claude Trichet on Tuesday sought to dismiss the markets’ concerns. “I don’t believe that financial stability in the euro zone could really be called into question,” he told lawmakers in Brussels. Observers “are tending to underestimate the determination of governments.”

But many analysts say the opposite -- that euro-zone governments are underestimating investors’ worsening lack of confidence in policymakers’ resolve to halt the crisis.

“Perhaps the biggest problem is lack of appreciation of the significance of confidence in the functioning of the modern credit economy,” currency strategists at investment firm Brown Bros. Harriman in New York wrote in a report Tuesday. “European officials have squandered this confidence and like toothpaste coming out of a tube, it is difficult to put it back in.”

As Reuters noted in a story from Brussels:

In theory the EU has a mechanism in place to try to stave off the pressure, and can act within hours via conference calls to take decisions. However, there are doubts about whether it is nimble enough to outwit or get ahead of the markets, and whether there is enough money to douse the spreading flames.

-- Tom Petruno

Photo: ECB President Jean-Claude Trichet. Credit: Yves Herman / Reuters