November 26, 2011New Strains Hit Euro, Global Markets
Common Currency Falls to Euro-Era Low After Italy's Borrowing Costs Soar; More Downgrades
Uncertainty in financial markets deepened as Italy's borrowing costs soared to euro-era highs and Prime Minister Mario Monti said European leaders understood an Italian collapse would mean "the end of the euro."
Europe's troubles weighed on markets world-wide: Stocks in the U.S. had their worst Thanksgiving week since 1942, the year the U.S. officially set the holiday at its current date. The Dow Jones Industrial Average has shed 7.6% the past two weeks. The common currency showed its own signs of strain, ending the week down 2.1%, its lowest level in almost two months.
Monday will see a significant test of investor sentiment when Italy holds another debt auction. Belgium, Spain and France are also scheduled to sell new debt during the week. All told, five euro-zone governments are together expected to sell about €19 billion ($25.36 billion) in debt over the week, more than double the past week's amount.
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Investors have dealt with an almost daily dose of bad news out of Europe, which is in the throes of a financial crisis that many fear could spark a global contagion with the potential to be more damaging than the 2008 collapse of Lehman Brothers Holdings Inc.
The renewed rise in Italian bond yields is particularly worrisome. Italy has the world's third-biggest bond market, and if it were to lose access to funding, the rest of the euro zone would struggle to keep the country solvent. Many economists believe Italy's €1.9 trillion of debt is too big for even the euro-zone's stronger economies to bail out.
A statement issued by Mr. Monti's office Friday said French President Nicolas Sarkozy and German Chancellor Angela Merkel had declared Italy the decisive battleground in the euro-zone crisis.
The French and German leaders "said they are aware that a collapse of Italy would inevitably lead to the end of the euro, causing the deadlock of the process of European integration and resulting in unforeseeable consequences," the statement said.
The three European leaders met behind closed doors in Strasbourg on Thursday. Italy is the euro zone's third-largest economy, behind Germany and France.
Mr. Monti's statement Friday is likely to ramp up pressure on Paris and Berlin to act more decisively in combating the crisis. The comments also show how the new leader is seeking to carve out a place for Italy at the currency's decision-making table, which has long been monopolized by leaders of France and Germany.
A spokesman for Mr. Sarkozy declined to comment on Mr. Monti's account. A spokesman for Ms. Merkel wasn't immediately reachable for comment.
Worries about slowing economies and rising debt levels spread beyond the euro zone. Moody's Investors Service downgraded Hungary to "junk" status, citing uncertainty about its ability to meet its debt-reduction goals and its heavy reliance on external investors, which raises the prospect of a flight of capital out of the country.
Also on Friday, Standard & Poor's downgraded Belgium's credit rating and a new report put France's consumer confidence in November at its lowest level since the last recession. And in Japan, government-bond yields rose after the International Monetary Fund warned about the country's ballooning budget deficit. Some signs emerged that foreign investors, particularly European banks, may be withdrawing money from the country.
In the U.S., stocks dropped only slightly on Friday. The Dow Jones Industrial Average declined 25.77 to 11231.78. The euro was down 0.8% to $1.3239.
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