Remember how last week, when everyone was talking about and reacting to the stuff going on in Greece, and Kthug had already written Greece off and moved on to Italy? This is why:
1) At this point, it seems Italy is now mathematically beyond point of no return
2) While reforms are necessary, in and of itself not be enough to prevent crisis
3) Reason? Simple math–growth and austerity not enough to offset cost of debt
4) On our ests, yields above 5.5% is inflection point where game is over
5) The danger:high rates reinforce stability concerns, leading to higher rates
6) and deeper conviction of a self sustaining credit event and eventual default
7) We think decisions at eurozone summit is step forward but EFSF not adequate
8) Time has run out–policy reforms not sufficient to break neg mkt dynamics
9) Investors do not have the patience to wait for austerity, growth to work
10) And rate of change in negatives not enuff to offset slow drip of positives
11) Conclusion: We think ECB needs to step up to the plate, print and buy bonds
12) At the moment ECB remains unwilling to be lender last resort on scale needed
13) But frankly will have hand forced by market given massive systemic risk
Hint:Not Good.Sell EUR, Buy Gold
The Times reports:
Italy’s financial crisis deepened on Wednesday despite a pledge by Prime Minister Silvio Berlusconi to resign once Parliament passes austerity measures demanded by the European Union.
Neither that move nor a reassurance from Italy’s president vouching for Mr. Berlusconi’s sincerity, calmed investors, who propelled Italy’s borrowing costs through a critical financial and psychological barrier of 7 percent, close to levels that have required other euro zone countries to seek bailouts.
Mr. Berlusconi, cornered by world markets and humiliated by a parliamentary setback, appeared to have become the most prominent victim of the broader European debt crisis. But his decision did not remove wide uncertainty about Italy’s ability to tackle the crisis, and some analysts said the prospect of a protracted period of political wrangling could exert further pressure for a quicker exit from the impasse.
Immediately after Mr. Berlusconi’s announcement on Tuesday, stocks rallied in New York on hopes that political change would help pave the way for an easing of the continent’s debt crisis. But, within hours, Europe’s stock markets fell on Wednesday for the third straight day in morning trading.
At the same time, yields on 10-year Italian government bonds — the price demanded by investors to lend money to Italy — surged on Wednesday to 7.4 percent, the highest level since the adoption of the euro more than 10 years ago.
Krugman puts it bluntly:
This is the way the euro ends.
This is the way the euro ends.
Not with a bang but with bunga-bunga.
Seriously, with Italian 10-years now well above 7 percent, we’re now in territory where all the vicious circles get into gear — and European leaders seem like deer caught in the headlights. And as Martin Wolf says today, the unthinkable — a euro breakup — has become all too thinkable:
A eurozone built on one-sided deflationary adjustment will fail. That seems certain. If the leaders of the eurozone insist on that policy, they will have to accept the result.
Every even halfway plausible route to euro salvation now depends on a radical change in policy by the European Central Bank. Yet as John Quiggin says in today’s Times, the ECB has instead been part of the problem.
I wonder how much the turmoil will spread back here to the US and to Asian markets, since everything is so interwined these days.