Belmont Club

Tick, Tock

“Investors today propelled Italy’s 10-year bond yield to close at a euro-era high of 7.25 percent after the promised exit of Prime Minister Silvio Berlusconi failed to convince them that his country can slash Europe’s second-largest debt burden,” according to Bloomberg. This will test the Eurozone’s commitment to maintain Italy’s solvency.

“While Italy is considered too big to fail, she may be too big to save unless there is a major change of attitude towards resolving the crisis,” said John Higgins, an economist at Capital Economics Ltd. in London. “Things could be about to turn very ugly.”

“It’s hard to see that Europe would have the resources to take a country the size of Italy into the bailout program,” Finnish Prime Minister Jyrki Katainen said yesterday.

Such dilemmas could push Italy into the arms of the IMF, days after Berlusconi said he turned down a credit line with the Washington-based lender. With G-20 leaders debating whether and how to boost the IMF’s $391 billion war chest to assist Europe’s crisis-fighting, Managing Director Christine Lagarde today warned of a potential “lost decade” for the world economy.

“The bazooka approach would be an IMF-led solution backed by the U.S., China and others,” said Fredrik Erixon, head of the European Centre for International Political Economy in Brussels.

But unless Erixon is referring to Bazooka Bubblegum, there seems little prospect that anyone will rush to Italy’s aid. America is busy coping. Reuters reports that stocks on Wall Street are sliding “a spike in Italian bond yields heightened fears the debt crisis in Europe was spreading.” Even the Chinese have their troubles. Forbes says that a slowing Chinese economy will be the big business headline of 2012.

Meanwhile, the debate over the Greek interim government entered the third day as “European finance ministers are waiting for the formation of a new government in Greece before deciding whether to grant the country a crucial $11 billion loan installment”. Waiting, waiting, waiting. But for what?

A senior British Labor politician admitted that the Euro may be in trouble unless someone acts. Former Chancellor of the Exchequer Alistair Darling said:

I despair of the way in which EU leaders are constantly behind events. I do not think enough people realize how serious this crisis is, and how hard it is going to hit us.

This is far worse than the banking crisis of 2008 in its seriousness and, if it is not solved by Christmas, I think the whole of the euro will break up.

I know of no one in private who thinks the solution proposed for Greece will work. Any solution that will leave Greece with debts of 120% of GDP in 2020 is simply not credible. Everyone knows there is going to have to be a larger cut than the 50% write-off.

Given the variety of opinions over what comes next and the universal disappointment with “they” or “them”, who is really in charge of this clattering train?  What happens if “they” are “us”?

Update:

The Wall Street Journal tries to explain the sudden spread of nervousness. Something wicked this way comes. Or was it some way this wicked comes?

The Dow is now right at its worst levels of the day, down about 430 points, the VIX is up 31%, and Treasury yields are back below 2% despite an earlier sloppy auction.

What gives?

Nothing less than the end of the euro zone as we know it.

Good riddance, you might be saying, but this could get a little messy, if that’s where we’re headed.

There’s a report that Merkel’s CDU is looking for ways to make it easier to bolt from the euro, according to an unconfirmed report from Handelsblatt (via Bloomberg).

Meanwhile, Reuters has a story about how Germany and France are looking into the idea of creating a super-secret euro zone that would be more tightly integrated and smaller — meaning, ostensibly, without all of these losers that can’t get their fiscal acts together.

It looks like something, not necessarily Christmas, has come early, but whatever got out of the sleigh has brought a mixed bag. Are we looking at the stealth return of the Deutschmark? Will the Euro end via Germany leaving it ahead of Greece? If no one knows what is going to happen then how can anyone prepare for what they don’t know impends? Or does someone really ‘know’, except they’re not letting on? Maybe Germany and France are on the biggest inside trade ever.

Prequel Alert:

Who could have guessed the Euro would be in trouble? Was it that hard to foretell? Or are there none so blind as they who will not see? Here’s Gordon Brown vs Nigel Farrage in 2009. And of course there was Nouriel Roubini just five days ago pridicting the Eurozone would collapse with world markets will follow. Mr. Sunshine was busy tweeting today and Roubini adds. “It will be soon an end-game for the Eurozone: restructurings and exits till break-up. Slow motion train wreck”

Louise Armistead at the Telegraph says that if Italy goes down then Britain might have to default on its loans. “A French default would be even more serious.” Ya think? Gee, am I glad that American banks are insulated from this lunatic project. Or are they?

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