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Is the euro zone's debt crisis beginning to 'rot its core'?

These are stories Report on Business is following Monday, Nov. 21. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Markets, currencies roiled Dual debt crises and economic fears combined to push down global markets today, roiling stocks and currencies.

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Tokyo's Nikkei shed 0.3 per cent, and Hong Kong's Hang slipped 1.4 per cent. Europe's major markets were down by up to 3.4 per cent, and the ugly mood spread into North America, where the S&P 500 and Toronto's S&P/TSX composite also slumped.

The Canadian dollar tumbled along with stocks, closing down almost a penny.

"It's a combination of political and economic worries weighing on markets today with the afternoon's focus on stalemate in the U.S. to agree budget cuts, said David Jones, chief market strategist at IG Index.

"There is also concern that the new government in Spain may be slow off the mark to put in place austerity measures to avoid a bailout - it does feel like we have been here before in one form or another in recent months and the net result is that investors have little reason to be loading up on risk at the beginning of this week."

Beyond the periphery The euro zone's two-year-old debt crisis has now spilled beyond the so-called periphery and into what are known as the "core countries." But for Germany.

Borrowing costs have been spiking in other countries well beyond Portugal, Ireland, Italy, Greece and Spain, now catching France up in addition to other countries. Indeed, France was warned today by Moody's Investor Service that continued elevation in bond yields could hit the country, threatening its triple-A rating.

"The yields on government bonds issued by France, Austria, Belgium and the Netherlands have risen sharply in recent weeks in a worrying sign that the euro zone's debt crisis is starting to rot its 'core' (with the notable exception of Germany)," John Higgins, senior markets economist at Capital Economics in London, said today. "We suspect this process has further to go."

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Mr. Higgins said the gaps between yields on 10-year bonds in some of the core countries and the yield in Germany have jumped to levels well above what they averaged since the creation of the monetary union, which now includes 17 member countries.

"This does not mean the gaps could not continue to grow, particularly if Greece defaults and leaves EMU and recent troubles in Italy and Spain start to intensify."

Mr. Higgins put together a "vulnerability" index in which he compares the bond yields. He finds that investors may be underestimating France's vulnerability, but overestimating the risk in Austria.

Sherry Cooper, the chief economist at Bank of Montreal, said the crisis is "moving very fast" and called for "decisive action." Among the proposals are a fiscal union, a eurobond and a beefed-up bailout fund.

Supercommittee fails The so-called supercommittee struggling to find ways to slash $1.2-trillion (U.S.) over 10 years came up short today, announcing it failed to reach a deal and setting the stage for automatic cuts beginning in 2013.

"After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee's deadline," said the two officials chairing the panel, Representative Jeb Hensarling of Texas and Senator Patty Murray of Washington.

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Fears of just such a collapse had been playing into the markets all day, adding to the gloom over the euro zone's spreading debt crisis.

"The failure does illustrate yet again the inability of Congress to take the tough decisions to put the federal finances on a sustainable path over the medium term," said Paul Ashworth of Capital Economics in Toronto. "Stock markets appeared to take a dim view of the continuing uncertainty, with today's 2-per-cent plus decline in the S&P 500 at least partly due to the committee's failure."

What comes next?

"On paper, the lack of an agreement is supposed to trigger automatic cuts totaling $1.2-trillion (summed over 10 years relative to the baseline), with a fairly heavy weighting on defense, with the remainder on both entitlements and other spending," said chief economist Avery Shenfeld of CIBC World Markets.

"But don't be too sure that fate is so automatic, at least not for a decade. Congress does have the ability to override the deal it reached over the debt ceiling, and the leader of the house armed services committee, for example, is already threatening to block the military spending cuts, although they might propose other cuts that the democrats (or Obama through a veto) would block. Moreover, a deal not done now doesn't preclude Congress getting back into action after the 2012 elections when, perhaps, the mood with be more constructive towards a compromise."

China fears mount Investors are growing concerned again about China, as China becomes more concerned about the rest of the world.

According to The Wall Street Journal today, in October China marked the first monthly outflow of foreign money since 2007 amid concerns that the country's economy is slowing. Coupled with that, according to the report, is the fact that investors have to bring their money back home to meet their own needs.

This also partly due to investors no longer believing the yuan will climb.

China, in turn, is warning that the global economy faces a bleak outlook.

How Canada conquered its debt crisis As Canada's former prime minister puts it in an interview with Reuters, "there would have been a day when we would have been the Greece today."

The news agency takes an in-depth look today at how Canada attacked its own debt troubles in the mid-1990s, with interviews with officials of the day, eventually bringing its debt-to-GDP ratio to 29 per cent by 2008-2009 from its high of 68 per cent in the 1990s.

There are some great moments retold in this piece, and some choice quotes from former prime minister Jean Chrétien and others from his time in office, when the Liberals decided they had to tackle the problem, no matter the cost. Among them:

"We used to thank God that Italy was there because we were the second-worst in the G7." Scott Clark, associate deputy finance minister at the time

"I said to myself, I will do it. I might be prime minister for only one term, but I will do it." Mr. Chrétien

"He said, 'Darling, I will be back home in the next election. I will be defeated, because the prime minister explained to us this morning what he intended to do." Mr. Chrétien, recalling how Lawrence MacAulay, a junior minister, phoned his wife after a key meeting

Canada, of course, went on to slay the dragon within four years with, Reuters notes, "the biggest reduction in Canadian government spending since demobilization after World War Two."

Fairfax bids for Prime Fairfax Financial Holdings Ltd. has its eye on the local pub.

Prem Watsa's company has jumped into the bidding for Prime Restaurants Inc. , the owner of dining and pub establishments such as Fionn MacCool's, D'Arcy McGee's, Paddy Flaherty's, Tir nan Og, East Side Mario's and Bier Markt.

Fairfax is offering about $71-million for the chain, a bid that was solicited by Prime after an offer from Cara Operations Ltd.

This followed a deal with Cara under which there was a so-called go-shop period to see if there were better offers out there.

"After carefully weighing the alternatives, in consultation with our legal and financial advisors, the board of directors has concluded that the Fairfax offer provides greater shareholder value than Cara's existing offer," chairman Steven Sharpe said in a statement.

Whither the wireless upstarts? With two CEOs recently departed from the Canadian wireless startups they helped get off the ground, a prominent industry analyst is asking whether the new companies have a fighting chance in a sector still overwhelmingly dominated by three big players, The Globe and Mail's Iain Marlow reports.

Canaccord Genuity analyst Dvai Ghose published a bearish research note citing the departures, as well as other management shuffles at the two companies, and wondered whether the Canadian government's attempt to engineer competition was failing in a sector where BCE Inc. , Rogers Communications Inc. and Telus Corp. still have roughly 95 per cent of the wireless subscribers.

Business ticker

Dumb, smart and arguably funny things 1. It's not often that you get to make a true "how-many-whoevers-does-it-take-to-change-a-lightbulb" joke. But today, The Canadian Press reports on access-to-information documents that show it cost the government a full $500 to move a light fixture from a room at Muskoka's Deerhurst Resort for the G8 summit. "The work order actually entailed an electrician, an apprentice/assistant and a carpenter for disassembly and relocation of the large boardroom table," said a spokeswoman for Skyline Hotels.

2. Britain's Transport Secretary Justine Greening warned today that air travellers will not be able to escape body scans when they're fully introduced. There have been health and privacy concerns related to such scans, but, Ms. Greening said in a statement today, I do not believe that a 'pat down' search is equivalent in security terms to a security scan." Here's what interested me: "Software which automatically analyses images is currently in development. Where this technology has developed to a stage at which it passes rigorous government testing, airports will be expected to deploy it when they renew or replace their equipment. This will mean that in the future images will no longer be seen by human reviewers. In addition, airports will also be required to undertake routine testing of hardware and software to ensure that they remain unable to copy, save, or otherwise transmit images. This will be verified by the Department's transport security inspectors."

I'm not sure what it means that human reviewers won't be able to ogle, and that only a machine gets to snicker at what you look like under your clothes.

3. Tweet of the day, from Nouriel Roubini @Nouriel: "The return to the Gold Standard caused the Great Depression. Now some gold bug lunatics want Gold Standard 2.0 to get us Great Depression 2.0."

4. Tweet from @BlackBerry today: "The #BlackBerry #PlayBook is at select #US & #Canadian retailers starting at $199. Limited time. #HappyHolidays!" This is good news?

5. Christmas is coming, and so are the office parties. You know, the parties that lead to the water cooler gossip and jokes the next morning? U.S. employment lawyer Patricia Weisberg has a list of dos and don'ts. It should be required reading, including why you should skip the mistletoe. "While most employers still want to foster a sense of fun for employees during the holiday season, it's becoming increasingly apparent that the traditional 'wild office party' of past eras is not healthy for the spirit and camaraderie of the employees in the modern workplace," Ms. Weisberg, a partner at Walter & Haverfield LLP of Cleveland, writes on TLNT.

In Economy Lab While having a budget can help, spending your free time at the mall and hoping to stay within budget is like spending your free time at the pub and hoping to lose weight: it just is not going to happen. Frances Woolley's advice for financial literacy month: Don't go shopping.

In International Business Until Iraqis sort out their future, the risk for oil company investors is that fools rush in, the Lex blog team at The Financial Times writes.

In Globe Careers

While team work is an asset, it's important to be noticed for your individual strengths as well. If your team did good work, make it known that it was you who led the team, Dianne Nice writes.

In Personal Finance Do you know what your break fee is? Only the bank does.

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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