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Now, debt worries crop up about Italy, Belgium

Throughout Europe's financial crisis, Italy and Belgium have managed to avoid being one of the countries that keep people awake at night. But even as concern mounts that Portugal and possibly Spain may seek financial aid after Greece and Ireland requested bailouts, investors have started asking whether those two economies may be the next weak links in Europe's monetary union, the euro.

business Updated: Dec 02, 2010 21:47 IST

Throughout Europe's financial crisis, Italy and Belgium have managed to avoid being one of the countries that keep people awake at night. But even as concern mounts that Portugal and possibly Spain may seek financial aid after Greece and Ireland requested bailouts, investors have started asking whether those two economies may be the next weak links in Europe's monetary union, the euro.

Italy and Belgium have a lot in common: Italy and Belgium both are less dependent on foreign creditors than Greece or Ireland. Both countries have long histories of debt and political problems that contributed to economic downturns in the past.

But no one seemed to pay attention during the current crisis until this week, when investors, transfixed by debt fears in other countries, drove borrowing costs in Italy and Belgium to near record highs.

Investors eased some of that pressure on Wednesday after the European Central Bank signaled that it could take new steps to prevent the market contagion by buying more bonds of crisis-stricken countries.

While few currently think these two countries have a high risk of defaulting, the spotlight could turn back to Belgium and glare harshest on Italy, the third-largest euro zone economy after Germany and France, if neither can muster the political cohesion needed to assure financial markets that they can reduce their debt.

Italy has done a better job than Greece in keeping its fiscal house in order during the debt crisis.

The Italian finance minister, Giulio Tremonti, cut government spending and overhauled its expensive pensions system with the blessing of Prime Minister Silvio Berlusconi's government.

The nation's current-account balance is modest, and it enjoys high household and corporate savings.

Government-issued debt is split almost evenly between foreign investors and Italians, who snap up the offerings to augment their savings. Italian banks, unlike Ireland's, are relatively sound and did not need a bailout.

But Italy has traditionally depended on state borrowing, even as its efforts through the years to improve growth have stumbled.