European debt crisis: Investors’ confidence shows signs of crumbling

European leaders will continue this week to slowly hammer out new structural measures to shore up the euro currency zone, but market confidence among investors already showed signs of crumbling late last week.

One month after European leaders struck deals over a bailout fund and a debt restructuring for Greece, financial markets are again gripped with pessimism and impatiently looking for more.

Germany is pressing for tighter fiscal discipline through budget controls that would initially draw approval from a few of the 17 nations that belong to the currency union without requiring time-consuming revisions of the union’s treaty. Critics say the plan would effectively create two euro zones, a central one paying lower interest rates and a peripheral one paying higher borrowing rates.

Meanwhile, international investors are holding back, said people familiar with the financial industry, because of uncertainty about the future of the euro zone and worry about how further downgrades of sovereign bonds by credit agencies might hurt banks.

Banks in Europe have also practically stopped lending to other banks, a key task of the financial system that central banks are now performing. And international financial officials fear a self-reinforcing crisis of confidence that could slow down economies — and damage financial institutions and governments alike — just as experienced technocrats are taking charge in Greece and Italy.

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