December 16, 2011
A common currency drove investors to Europe's outer reaches, then scared them away.
The first decade of the euro intertwined the Continent's financial systems as never before. Banks and investment funds in one euro-using country gorged on the bonds of others, freed of worry about devaluation-prone currencies like the drachma, lira, peseta and escudo.
But as the devaluation danger waned, another risk grew, almost unseen by investors: the chance that governments, no longer backed by national central banks, could default.
The first hints of such a peril came with Greek budget problems, and as investors grew increasingly wary of Greece, debt worries spread until they set in train a reversal of the historic process of European financial integration—with manifold consequences now being played out.
Banks, insurance companies and pension funds in Northern Europe have slashed their lending to overextended countries to safeguard their money. Many now are comfortable investing only at home or in the safest markets such as Germany.
"We are seeing this deglobalization, a 'de-Euroization,' of the euro zone," said Andrew Balls of Pimco, head of the big bond shop's European portfolio management. "Investors are going back to their own markets. They may still hold bonds, but they won't have them spread across the euro zone as they had before."
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