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Bond yields rise again in Europe; IMF offers new help

November 22, 2011 | 11:50 am

There's a breaking point out there somewhere for Europe's debt crisis, and markets seem intent on finding it.

Investors on Tuesday continued to demand higher yields on government bonds of Spain, Italy, France and Belgium, as the continent’s debt woes deepened.

Greece, the epicenter of the crisis, is almost the least of Europe’s worries now.

Spain had to pay 5.11% to issue three-month government bills, more than twice what it paid a month ago. A leader of Spain’s new governing party called on the rest of the Eurozone to “save and guarantee the solvency” of the country’s debt market, saying that borrowing costs were becoming prohibitive.

The yield on 10-year Spanish bonds rose to a new euro-era high of 6.61% from 6.55% on Monday.

Belgium’s 10-year bond yield surged to 5.08%, up from 4.82% on Monday and the highest since 2008.

The International Monetary Fund, led by France's Christine Lagarde, announced that it would make it easier for struggling countries to tap IMF credit lines. That may help, but it’s also a sign that the situation in Europe is worsening.

Financial markets have been looking to the European Central Bank to halt the contagion. In theory, the ECB could commit to buying unlimited quantities of government bonds to try to hold down rates. But the bank has seemed reluctant to act aggressively, and Germany and France are clashing over how big a role the ECB should play.

German Chancellor Angela Merkel continues to oppose a massive bond-buying program by the ECB. She also opposes the idea of Eurozone governments issuing bonds backed by all countries in the currency union. Merkel wants to put more pressure on cash-strapped governments to get their fiscal houses in order.

But as bond yields continue to rise and Eurozone stock markets continue to sink, the risk is that Merkel could push Europe’s financial system into an abyss.

Stocks fell further Tuesday, with the Italian market down 1.5%, Spanish shares down 1.4% and the French market down 0.8%. The markets are sinking closer to the 2 1/2-year lows reached in September.

The euro currency, however, was steady at $1.351, up slightly from $1.349 on Monday.


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-- Tom Petruno

Photo: International Monetary Fund Managing Director Christine Lagarde. Credit: Michele Tantussi / Bloomberg News