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Investors flee European bonds

LOS ANGELES – Europe’s debt crisis is going from bad to worse – again.

Investors dumped government bonds of Portugal, Ireland, Italy and Spain on Wednesday, driving market yields up sharply, after Moody’s Investors Service slashed Portugal’s bond rating to junk status late Tuesday.

The bond sell-off slammed the euro and also helped drive most European stock markets lower for a third day.

The annualized yield on two-year Portuguese bonds soared to a record 16.74 percent from 12.94 percent Tuesday.

Moody’s said its downgrade was triggered by “growing risk” that Portugal will need a second bailout by the rest of Europe and that private bondholders could be forced to participate in a bailout as a precondition for more aid.

European governments are pressing private investors in Greek bonds to agree to restructure that country’s debt as part of the eurozone’s planned second bailout of Athens, which is being crushed by a debt burden of nearly $500 billion.

Moody’s clearly is worried that a Greek deal with private bondholders could set the stage for Portuguese bondholders to be forced into concessions, such as taking a cut in their interest earnings.

By fleeing Portuguese debt and driving borrowing costs to extreme heights, investors are making it more likely that Portugal will be unable to raise money in the bond market and thus will be forced to seek more aid from the rest of Europe.

What’s more, the latest surge in yields on Irish, Italian and Spanish bonds raises the risk that the debt crisis could turn into a wildfire in European markets, threatening another financial-system meltdown.

Moody’s downgrade of Portugal “highlights reoccurring doubts about the ability of eurozone policy makers to ring-fence contagion and in turn stymie the eroding market confidence,” currency analysts at Brown Brothers Harriman said in a note Wednesday.

Moody’s decision evoked an angry response from the European Union, which accused the company of anti-Europe bias.

But investors voted with their feet: The yield on two-year Irish bonds jumped to 15.31 percent from 12.88 percent Tuesday.

Italian two-year bond yields rose to 3.27 percent from 3.09 percent; Spanish two-year yields rose to 3.62 percent from 3.43 percent.

The euro tumbled 0.8 percent to $1.431 from $1.443 on Tuesday, though it’s still well above its recent low of $1.405 on May 23.