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European bond yields soar, stocks plummet on debt fears

Europe’s debt debacle worsened Monday as market yields surged again on government bonds of the continent’s weakest economies.

The latest jump in yields triggered another exodus from European stocks, driving many markets to new lows for 2011. Most U.S. stock indexes, by contrast, still are in positive territory this year, although they were sinking again Monday.

The Dow Jones industrial average was off 131 points, or 1.1%, to 12,348 at about 11:45 a.m. PDT, after losing 1.4% last week on rising worries about America's own debt drama.

Euro-zone leaders still are feuding over how to structure a second bailout of Greece, and whether to demand that private bondholders share the pain by permanently restructuring their debt.

A summit Thursday in Brussels is supposed to produce a solution. But European markets showed little faith in the outcome.

And as investors continue to demand ever-higher interest rates on Portuguese and Irish bonds, second bailouts of those countries seem inevitable as well.

“At current interest rates, these governments can't fund themselves via the private debt markets,” said Andrew Busch, public policy analyst at BMO Capital Markets.

Port2yrbond The yield on two-year Irish bonds rose to 23.2% Monday from 23.1% Friday and 17.8% a week ago. The Portuguese two-year bond yield (charted at left) rose to 20.4% from 19.4% Friday and 18.3% a week ago.

By contrast, the U.S. Treasury’s two-year notes pay a yield of just 0.36%, despite the risk of a debt default if Congress refuses to raise the federal debt ceiling by Aug. 2.

In Europe, what's most worrisome is that the “contagion” of Greece, Portugal and Ireland has infected the much bigger economies of Spain and Italy. Rising yields on Spanish and Italian bonds threaten to undermine those countries’ finances and create a far larger crisis for Europe.

The yield on two-year Italian bonds rose to 4.6% on Monday from 4.2% on Friday. The yield was just 3.0% two weeks ago.

Rising yields in Italy mean “the European financial crisis has entered a new and far more dangerous phase,” former U.S. Treasury Secretary Lawrence H. Summers wrote in an op-ed piece on Reuters.

Italy is the world’s third-largest bond market, after the U.S. and Japan.

The Italian stock market suffered the biggest decline Monday of any major European market, falling 3.1%. Italy now is officially in a new bear market, with its key share index down 22.8% from its 52-week high reached in February.

Stocks tumbled 2% in France, 1.6% in Germany, 2.1% in Sweden and 2.3% in Portugal.

The euro fell 0.6% to $1.407 from $1.416 Friday, but remains above its recent low of $1.398 set last week.

-- Tom Petruno

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