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Europe a tinderbox today, France next 'domino' to fall

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Europe seethes Europe is a tinderbox this morning, its financial crisis deepening and protests mounting.

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In Italy, demonstrators clashed with police and the country's new prime minister, Mario Monti, unveiled a fresh crisis plan. In Greece, where protests and strikes have been widespread, authorities have thousands of police officers on hand for another demonstration today.

Mr. Monti has taken a firm hold on the government, appointing a cabinet with no politicians. Today, all eyes were on his proposals for more bitter medicine. Mr. Monti certainly appeared to be taking the right approach. As our European correspondent Eric Reguly reports, Mr. Monti promised to focus on economic growth, which suggests he won't be as harsh in his measures as Greece has been.

"For the group, the honeymoon period will be short (or rather, non-existent), as the new cabinet will need to work quickly to restore investor confidence in the face of rising debt costs," said Carl Campus of BMO Nesbitt Burns. "Monti will lay out his policy platform today and then face a confidence vote in the Senate Thursday evening (followed by a separate confidence vote by the lower house on Friday)."

In the markets, borrowing costs hit punishing highs again in what is unquestioningly a frightening new chapter in the euro zone's two-year-old debt crisis.

"Italian benchmark yields are back in the bailout zone, above 7 per cent, despite the installation of a cabinet of technocrat experts in Rome, while Spanish yields are heading merrily towards the same abyss," said Chris Beauchamp of IG Index in London.

"Ten-year yields were at 6.69 per cent before a bond auction that saw them soar to 6.97 per cent, right on the cusp of rescue territory. Even more worrying was the continuing rise in French bond yields, and while these might be nowhere near the danger zone, it reminds everyone that the next euro zone domino after Italy and Spain is France."

The spread between French and German 10-year yields climbed today to two full percentage points, which reports said was the widest in more than two decades.

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As Brian Milner writes in today's Report on Business, leaders of the 17-member monetary union have simply been unable to get a grip on the debt crisis. Two prime ministers have fallen in the past two weeks - Italy's Silvio Berlusconi and Greece's George Papandreou - but wary investors continue to push bond yields higher nontheless.

There are options available - action from the European Central Bank, a pan-Europe bond and a pledge for a tight-knit fiscal union - but deep rifts among the region's politicians indicate these are not likely to happen any time soon.

Markets antsy Against this backdrop, of course, stock investors are increasingly nervous today, following a warning from the Fitch ratings agency late yesterday of the threat to U.S. banks from the euro crisis.

While Tokyo's Nikkei eked out a gain of 0.2 per cent, Hong Kong's Hang Seng shed 0.8 per cent and European markets, in the eye of the storm, also sank, as did North American markets.

"Last night, the Dow Jones suffered substantial falls after ratings agency Fitch helpfully stated the patently obvious, noting that U.S. banks would suffer heavily if the euro zone debt crisis spread beyond its current limits," said Chris Beauchamp of IG Index in London. "As a result the U.K. banking sector has sold off in sympathy with its Atlantic cousins, with the situation being exacerbated by the situation in Italian and Spanish yields."

While the Fitch report may have been stating the obvious in some ways, that doesn't mean it should be discounted. There are risks for America's banks depending on how this thing plays out and how much further the crisis spreads.

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"A Fitch report out late yesterday arguing that 'further contagion poses a serious risk' to U.S. bank credit ratings is also making the rounds, especially as borrowing costs for countries such as Belgium and Austria have also risen lately," said Derek Holt and Karen Cordes Woods of Scotia Capital.

"And indeed, recent data released out of the [Bank for International Settlements]shows that Europe accounts for roughly 45 per cent of total U.S. foreign holdings, with France, Germany, Greece, Italy, Ireland, Portugal and Spain combined accounting for about 16 per cent."

Blame Canada Target Corp. , Tiffany & Co. and other U.S. retailers may be loving Canada, but Sears Holdings Corp. isn't having much fun.

The retailer today posted a wider third-quarter loss, in part blaming both its Canadian operations and the Canada-U.S. exchange rate. The loss attributable to Sears climbed to $421-million (U.S.) or $3.95 a share from $2.18 or $1.98 a year earlier. (Adjusted EBITDA for Canada, which ranks right up there with Kmart, sank to a loss of $8-million from a gain of $58-million.)

"For the quarter, our gross margin declined $110-million to $2.4-billion in 2011," the company said. "The total decline was primarily driven by decreases in the gross margin rate at Kmart, Sears Domestic and Sears Canada and included an increase of $10-million related to the impact of foreign currency exchange rates on gross margin at Sears Canada."

Central banks buy gold The world's central banks are loading up on gold as they diversify their holdings.

A quarterly report released today by the World Gold Council showed central banks acquiring almost 150 tonnes, marking the heftiest purchases in decades.

"Activity among central banks continued to fulfill our expectations of further purchases in [the third quarter]" the group said.

"In fact, net buying accelerated notably during the quarter - totalling 148.4 tonnes - as the issues surrounding the creditworthiness of weatern governments' debt seeped into the official sector. A number of banks continued their well-publicized programs of buying, while a slew of new entrants emerged wishing to bolster their gold holdings in order to diversify their reserves. We see this trend continuing into 2012."

Central banks are looking for alternatives to the euro and the U.S. dollar in their reserves, according to senior currency strategist Camilla Sutton of Scotia Capital, and the trend has been into bullion over the past six to nine months.

While the World Gold Council doesn't name the central banks that are buying, but Ms. Sutton said they are largely in emerging market countries whose reserves are climbing. It's not that they're selling euros and American dollars, she said, but rather that "their reserves are growing so fast that gold is a natural place to go."

EI claims fall Claims for Canadian jobless benefits have resumed their year-long decline after a temporary bump in August.

The number of unemployed collecting regular EI benefits fell 2.7 per cent in September, Statistics Canada said today. The number of initial and renewal claims fell by 10.5 per cent.

In the United States, initial claims fell last week to 388,000, the lowest since the spring.

"This has been a very good week for U.S. economic indicators," said senior economist Jennifer Lee of BMO Nesbitt Burns. "It started with the retail sales report, then industrial production, and now we can add UI claims and housing to the list. Now if only Europe's problems can be fixed, the world would be more optimistic."

In Economy Lab Tepid economic growth is hampering the ability of Canadian businesses to raise consumer prices despite higher raw material costs, Rita Trichur writes.

In International Business In some respects, The Financial Times writes, Spain is in a healthier position than Italy, and won't be subverting its democracy with a stopgap technocratic government.

In Globe Careers Working on building your network and doing something you like can be more beneficial when unemployed than pounding the pavement or sitting at the computer endlessly refreshing, says Harvard Business Review.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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