Bond yields surge across Europe as debt ratings downgraded

With European government bond markets already in severe distress, the credit-rating companies keep delivering their equivalent of a blast of pepper spray.

Bond yields surged again across Europe on Friday, one day after Fitch Ratings cut Portugal’s debt rating to “junk� status.

After markets closed, Standard & Poor’s dealt yet another blow to Eurozone debt, cutting Belgium’s rating to AA from AA+. S&P cited growing doubts that Belgium will be able to reduce its debt load as the continent’s economic situation deteriorates.

Meanwhile, Moody’s Investors Service lowered Hungary’s debt rating to junk on Thursday, and Greece reportedly was trying to drive a harder bargain with creditors as it negotiates to have a large portion of its debt forgiven.

All of this made Friday a bad day to try to borrow in the Eurozone, but Italy tried anyway — and paid a high price. Investors demanded a 6.5% yield on $10.6 billion of six-month Italian treasury bills, up from 3.09% just a month ago.

After Fitch’s downgrade of Portugal, the yield on 10-year Portuguese bonds jumped to 12.64% from 12.21% on Thursday.

Before S&P’s announcement on Belgium, 10-year Belgian bond yields rose to a euro-era high of 5.86% from 5.74% on Thursday. Two months ago the yield was 3.82%.

Investors have been hoping for a major new incentive by European authorities to stop the debt crisis from spreading. But on Thursday, a meeting of German Chancellor Angela Merkel, French President Nicolas Sarkozy and European Central Bank President Mario Draghi left markets with no reason to expect new help.

Merkel again rejected the idea of Eurozone governments issuing bonds backed by all countries in the currency union, which in effect would make Germany responsible for other nations’ debts.

But in a bad sign for Merkel, yields also rose further Friday on German bonds, which until this week had been the one haven left in European debt markets. The 10-year German bond yield ended at 2.26%, up from 2.19% on Thursday and 1.97% a week ago.

European stock markets mostly managed to rebound a bit Friday after steep losses in recent days. But the euro currency was hammered, falling 0.9% against the dollar to $1.323. The euro has tumbled from $1.353 a week ago and $1.419 on Oct. 27.

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