WRAPUP 4-Euro zone periphery hammered as default fears rise

* Risk premiums on peripheral euro debt hit lifetime highs

* Trichet warns against underestimating EU resolve

* Citigroup sees default worries spreading beyond euro zone

* Euro sinks below $1.30 for first time since mid-Sept

(Updates market prices, adds Trichet, Barclays economists)

By Rex Merrifield

BRUSSELS, Nov 30 (BestGrowthStock) – The euro zone’s debt crisis
deepened on Tuesday, with investors pushing the single currency
lower and the spreads on peripheral bonds up to new highs amid
concern weak member states may ultimately be forced to default.

European policymakers came out in force to try to calm
markets, with European Central Bank President Jean-Claude
Trichet warning that pundits were underestimating the
determination of governments to keep the euro zone stable.

But markets paid little attention, pressuring Portugal,
Spain and Italy only days after the EU agreed to an 85 billion
euro ($110.7 billion) bailout for Ireland.

The borrowing costs of countries like Belgium and France
also rose as investors looked beyond the euro zone periphery and
targeted core founding members of the bloc.

“The crisis of confidence in Europe can’t be resolved
quickly,” said Rick Meckler, president of investment firm
LibertyView Capital Management in New York. “No single event can
put things back in order.”

A Reuters survey of 55 leading fund management houses showed
U.S. and UK investors had significantly cut back their exposure
to euro zone bonds this month, piling into equities instead
despite a weakening in global shares. [ASSET/WRAP]

Markets are already discounting an eventual rescue of
Portugal although the government in Lisbon denies, as Irish
leaders initially did, that the country needs outside aid.

While a Portuguese rescue would be manageable, assistance
for its larger neighbour Spain would sorely test EU resources,
raise deeper questions about the integrity of the 12-year-old
currency area, and possibly spread contagion beyond Europe.

Citigroup Chief Economist Willem Buiter described the
turbulence hitting the euro zone as an “opening act” and
predicted that sovereign default fears could soon extend to
Japan and the United States.

“There is no such thing as an absolutely safe sovereign,” he
wrote in a research note.

Trichet, speaking at a European Parliament hearing in
Brussels, said the bloc needed to regain its sense of direction
and move towards a “quasi budget federation” to address concerns
about fiscal and economic imbalances. [ID:nLDE6AT1X9]
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For an interactive timeline on the Eurozone debt crisis in 2010, click on http://link.reuters.com/nyx95q For Take a Look on euro debt crisis, click [ID:nLDE68T0MG] For multimedia coverage on the Euro Zone Crisis page on Top News: http://r.reuters.com/hus75h For graphic on debt crunch, click http://r.reuters.com/zem66q For Breakingviews column on the crisis, click [ID:nLDE6AS1NK] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

EURO HIT, SPREADS WIDEN

The euro fell (Read more about the trembling euro. ) for a third straight day, dipping to a 10-week
low of $1.2969 before paring its losses to trade above $1.30 in
late European trading. The currency has lost over 7 percent of
its value against the dollar this month. [FRX/]

The yield spreads of 10-year Spanish (ES10YT-TWEB: ), Italian
(IT10YT=TWEB: ) and Belgian (BE10YT=TWEB: ) bonds over German
benchmarks (DE10YT=TWEB: ) spiked to their highest levels since
the birth of the euro in January 1999 and the cost of protecting
against a euro zone sovereign default surged. [ID:nLDE6A91Y5]

Jitters also hit European banking shares (.SX7P: ), which were
led lower by French banks BNP Paribas (BNPP.PA: ), Societe
Generale (SOGN.PA: ) and Credit Agricole (CAGR.PA: ) on market
rumours Standard & Poor’s might cut France’s outlook.

“There is no reason for concern, no risk,” said Francois
Baroin, France’s budget minister and government spokesman. S&P
declined to comment. [ID:nLDE6AT0QS]

Italian officials also scrambled to play down the threat to
their economy, the euro zone’s third largest, which some
economists have labelled “too big to bail”.

“Italy’s public finances are sound, we are not among the
countries at risk,” said Treasury Undersecretary Luigi Casero.

Weakened governments in Italy, Ireland and Portugal have
deepened the sense of crisis by sowing doubts among investors
about their ability to act swiftly and decisively to bring their
debt and deficits under control.

Portugal’s central bank warned on Tuesday that its country’s
banks faced an “intolerable risk” if the government in Lisbon
failed to consolidate public finances.

The minority Socialist government in Portugal approved an
austerity budget for 2011 last week, but is struggling to meet
its targets for deficit reduction. [ID:nLDE6AT0R1]

DIVERGENCES

Data released on Tuesday underscored the degree of economic
divergence within the euro zone, which represents an increasing
challenge to the European Central Bank and its one-size-fits-all
monetary policy.

German unemployment fell in November for a 16th straight
month while joblessness in Italy jumped and Greek retail sales
plunged under the weight of crushing austerity agreed in
exchange for its 110 billion euro bailout.

In addition to sealing Ireland’s bailout, European leaders
approved on Sunday the outlines of a long-term European
Stability Mechanism (ESM) that will create a permanent bailout
facility and make the private sector gradually share the burden
of any future default.

Although private bondholders will not be asked to share the
cost of debt restructurings until late 2013, and then only on a
case-by-case basis, the mechanism has stoked fears of defaults
and so-called “haircuts” down the road.

Some economists believe markets are going too far in
targeting Spain and Italy and believe more decisive action from
EU leaders would help limit the contagion.

“We believe that policymakers need to shift from a purely
reactive stance – in which packages are quickly cobbled together
under severe market pressure – to a proactive policy that
provides clarity and assurance,” economists at Barclays Capital
said in a note.

(Writing by Noah Barkin, editing by Mike Peacock, John
Stonestreet)

WRAPUP 4-Euro zone periphery hammered as default fears rise