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‘A reversal of the process of European financial integration.’

By STEPHEN FIDLER and DAVID ENRICH [Wall Street Journal] – 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.

Continued at The Wall Street Journal | More Chronicle & Notices.

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