Endspiel

The European debt drama appeared to be heading into its final act as the US and the rest of the world refused to kick more money into the rescue package. They Cannes not do it. Markets fell immediately on the news. Most ominously, Italian bond rates began to climb after the failure of the G20 meeting to scare up any more cash and have already hit a Euro-high record.

A rise in the cost of Italian borrowing could prove fatal to the Euro as it is presently constituted. The European rescue fund, while large enough to rescue Greece, is too small to save Italy.

Traders were also unnerved by a move by the IMF to monitor Italy’s austerity drive, although Prime Minister Silvio Berlusconi said he doesn’t think Italy needs a loan from the IMF.

A sustained weakness in Italian bonds should worry policy makers. Italy’s large size–its government bond market is the third-largest in the world–would severely test the firefighting capabilities of the EFSF should the country’s borrowing costs rise to unsustainable levels.

The 6% mark on the 10-year bond is seen as crucial because a breach of that level in the past has portended a sharp rise in bond yields of other fiscally frail countries.

But despite the fact that Berlusconi denied needing the IMF, it was his government which requested IMF supervision, possibly because it was going to be forced on them anyway. The Italian leader, like his counterpart in Greece, may be running out of luck. He is facing a challenge to his tenure. It is a challenge he may well lose. “If the current Greek tragedy is not to turn into an Italian tragedy, with far more serious and far-reaching consequences for the euro zone, Berlusconi must resign immediately [or be] remembered as the architect of Italy’s descent into an economic inferno” according to Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.

Berlusconi’s government asked the International Monetary Fund to periodically assess its debt-reduction progress, while rejecting an offer for financial assistance from the Washington- based lender, he told a press conference today at the Group of 20 summit in Cannes, France.

“It hasn’t been imposed, it was requested,” Berlusconi said. The IMF will carry out quarterly “certifications” of the euro region’s third-largest economy, he said, adding that the current sell-off of Italian debt is “a temporary trend” even as the nation’s borrowing costs surged to a new euro-era record.

Berlusconi is coming under mounting pressure at home and abroad as Italy struggles to avoid succumbing to the sovereign- debt crisis. His efforts suffered a setback yesterday when at least two lawmakers defected to the opposition. As many as eight other members of his coalition have called for a change of government, threatening his majority in Parliament, Corriere della Sera reported today.

CNBC says that “the eyes of the world have been trained on Greece for most of this week, but, as the Hellenic crisis approached breaking point, signs are that Italy will be the next focus. … The key issues which a new government needs to address include a large-scale privatization plan and reform of the labor market.” That makes Italy and indeed Spain precisely like Greece in that, with the last hope of financial escape shut in their face they find themselves left only with the alternative of weakening the unions, reducing their welfare levels and restoring competitiveness to their economies.

The long term choice is now between financial collapse and dismantling the huge and expensive European social model. That means the European elites and their satrapy — the Indispensables — will have to descend from their Olympus. In Greek the notion for this change might be catastrophe, an overturning. In the Northern Regions the term may be the twilight of the gods. But whatever the word, as the continent heads into a time of uncertainty, the only certainty is that turmoil lies ahead.

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