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Europe debt crisis spreads to stronger economies

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'Self-reinforcing panic'

Bonds are crucial to the health of national economies, because they provide a means for governments to finance their spending. As yields on the bonds rise, the more expensive it becomes for governments to borrow that money – and thus high bond yields can add an unbearable burden to countries already struggling with extensive debt and low – even negative – economic growth.

So far, the EU has been unable to calm the markets. Italy's borrowing costs have now risen above 7 percent, a level considered unsustainable, while yields also rose in countries like Austria – a country not seen as part of the "usual suspects" group when it comes to debt concerns.
All this despite the European Central Bank (ECB) buying around €1 billion worth of eurozone bonds daily.
"There's a self-reinforcing panic about the whole thing," says finance analyst Daniel Ben-Ami, author of the book "Ferraris for All: In Defence of Economic Progress."

"There's still an element of panic, partly about the integrity of the European banking system – which isn't just about Italy and Greece – but also because investors are not certain these new governments will be able to solve the problem," he says.

Mr. Mangus, the UBS economist, suggests bolder measures are necessary to calm investors. Such measures could include: the ECB providing a so-called "backstop" guarantee, including by acting as lender of last resort to Italy – a creditor to be counted on even if the country defaulted on its debts; German agreement on the issuing of shared eurobonds, and "hard and fast" proposals on eurozone fiscal integration.

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