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A woman talks on her telephone outside San Francesco di Paolo Basilica on November 14, 2011 in Naples, Italy.Christopher Furlong/Getty Images

What began as an effort to save Greece has devolved into a desperate struggle to hold the euro zone together.

Now that even Germany – Europe's most creditworthy country – is struggling to raise cash, there's no haven left within the 17-member common currency. On Friday, two more countries, Hungary and Belgium, saw their credit ratings downgraded as Italy struggled with a bond auction that saw long-term borrowing coasts soar to unsustainable levels.

"The threat that the crisis is more aggressively migrating into the core economies is real," warned Scotia Capital Inc. economist Derek Holt.

On Friday, the severe strains in the European bond market forced Italy to pay 6.5 per cent on six-month Treasury bills – a new high since the euro's creation. Yields for two-year bonds reached a record 7.83 per cent. The Canadian government, by comparison, borrows six-month money at less than 1 per cent.

"The problem is that Italy is too big to rescue. So the euro experiment itself in being jeopardized," explained David Rosenberg, chief economist and strategist Gluskin Sheff & Associates in Toronto.

The Italian auction capped a terrible week for the euro zone. There was a botched German bond auction Wednesday and continued sniping between European leaders over how to ease the crisis.

It isn't likely to get any easier next week as several euro zone countries, including Italy, France and Spain, prepare to sell a combined €19-billion worth of bonds to increasingly nervous investors.

Italy alone must raise another €18-billion ($26.3-billion) by the end of the year and €440-billion next year to finance its massive debt.

Even yields on once ultra-safe German bonds have drifted up in recent days. On Wednesday, investors shunned an offering of its 10-year German bonds.

The larger quandary for Europe is that Germany – the euro zone's largest economy and most financially sound – won't hand over its credit card to save the euro. German Chancellor Angela Merkel has repeatedly rejected the idea of common euro-zone bonds or using the European Central Bank as a lender of last resort. Doing so would force up interest rates on German bonds, as the country bears a greater responsibility for the debts of its neighbours.

"A euro-bond issue runs the risk of bringing Europe's credit crisis more aggressively into Germany," Scotia Capital economists Mr. Holt and Karen Cordes Woods pointed out in a research note. That, in turn, could severely test the "resolve of German voters to backstop major European Union initiatives," according to Mr. Holt and Ms. Cordes Woods.

Germany must refinance €578-billion worth of bonds over the next three years, including €273-billion next year.

Germany wants radical changes in the European governance structure to force common fiscal policies within the euro zone, but that's a process that could plod along for months. German officials have raised concerns that the euro area's more indebted countries would face less pressure to get their finances in order if they had access to euro bonds.

On Friday, Moody's cut Hungary's credit rating to junk, after 15 years at investment grade. The move came after Prime Minister Viktor Orban reversed a policy of shunning the International Monetary Fund to request assistance, while insisting he doesn't want conditions attached to any new credit line.

"They'll either have to strike a quick deal with the IMF or the market will force them to," said Viktor Szabo, London-based portfolio manager at Aberdeen Asset Management. "If the European crisis continues Hungary may remain among the worst performers."

Standard & Poor's downgraded Belgium's credit rating to double-A from double-A-plus, reflecting the uncertainty sparked by a political deadlock that has left the country without a formal government for 18 months.

One of Britain's top bank regulators said Friday that planning for the exit of one or more members from the euro currency is now "within the realm of contingency planning." Andrew Bailey, deputy head of prudential business at Britain's Financial Services Authority, said failure to plan for a euro breakup would be "unsound risk management."



With files from Reuters and Bloomberg News

VOICES FROM GERMANY

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"Not all Germans are saying they don't want to send money to all those countries [hit by the debt crisis] Deutsche Bank did lend money to Greece ... [The crisis]will hit Germany and it will hit German banks, but not as tough as countries such as Italy, Ireland, Portugal or Greece."

Stefan Kauertz, film producer, Dusseldorf

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"Should Germany pay many billions [to help bail out other countries] That's the big problem – explaining it to someone working 40 hours a week to give money to another country to save it from going bankrupt. Right now, to save Greece, I think it's the only thing we can do."

Rafaela Kuchenmeister, student, Berlin

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"They have been trying several ways of tackling [the debt crisis]but … a euro bond or similar instrument [should be]developed and issued instead of the national individual ones. This could be done through the European Commission in Brussels or with other methods of financial management. A euro bond in one form or another will be necessary."

Andreas Meyer-Schwickerath, director, British Chamber of Commerce in Germany, Berlin

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"The urgency for a credible plan within Europe has never been greater and is growing by the hour. Greece officially goes bankrupt after Dec. 16, so there are unfortunately a number of moving obstacles which can at any time cause yet more market uncertainty."

Neil Dwane, chief investment officer Europe, RCM, Frankfurt

Peter Carvill, Special to The Globe and Mail

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