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.
The biggest signal yet that the single currency's third- largest economy is falling prey to its two-year debt crisis forces German Chancellor Angela Merkel, European Central Bank President Mario Draghi and their peers to decide just how far they're willing to go to defend the euro.
"The market is testing the commitment of the euro zone's stewards," said Eric Chaney, Paris-based chief economist at insurer AXA SA and a former official in the French Finance Ministry. "Italy is the real crisis battleground."
At 1.9 trillion euros ($2.6 trillion), Italy's debt exceeds that of Greece, Spain, Portugal and Ireland combined, though unlike those nations, it has systemic importance as the world's third-largest bond market and eighth-biggest economy..
.."This is a form of meltdown," said Marc Ostwald, a fixed- income strategist at Monument Securities Ltd. in London. "I would imagine the telephones between international finance ministries and central banks are in danger of running so hot they'll melt down themselves."
"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.
..Andrew Bosomworth, a senior portfolio manager at Pacific Investment Management Co. in Munich, senses a "watershed moment." With Italy all but locked out of markets, European officials may have to jettison their short-term firefighting and pick between a smaller, stronger euro zone or a federalist structure with greater cross-border support.
"What is happening is what they've been trying to stop," said Bosomworth, a former ECB economist.
Read the complete article here; http://beta.finance.yahoo.com/news/italy-bond-attack-breaches-euro-174813139.html
There is no 'magic bazooka'. The 'powers that be' only ever had the power that the people bestowed upon them. But faith in the power of policy makers is starting to erode. Soon the mood of the people will expose them as impotent and that's when the crisis escalates to panic.
