Italian bond yields have exploded upwards past the critical sustainability zone, Berlusconi has fired tried to fire his finance minister who had held the entire show together and the share prices of Italian banks – particularly Unicredito – are collapsing.

As respected bloggers are starting to wonder whether Europe’s leaders are fiddling while Rome starts to burn, it increasingly looks like the end of the road is very close for the European can-kicking exercise that started with the collapse of Lehman Brothers and which had continued unabated since.

From the UK Independent, Euro is Plunged Into Crisis as Contagion Hits Italy:

European finance ministers were struggling last night to persuade nervous markets that Italy will not be the next domino to fall in the eurozone’s apparently endless succession of sovereign debt crises.

But this time is different, as the saying goes: unlike Greece, Portugal and Ireland, the sheer size of Italy’s economy and the scale of her debts are way beyond the resources of the current EU/IMF rescue funds, and probably any conceivable new arrangements.

The Independent goes on:

An Italian sovereign debt crisis, as observers and policy makers have long quietly feared, could quickly mutate into an existential crisis for the euro itself, probably spread via Europe’s highly integrated and vulnerable banking system. French banks in particular are thought to be badly exposed to Italy, as they are to Greece.

As talk of “contagion” mounted, Italian government bonds suffered the same kind of abandonment seen before in the cases of Greek, Portuguese and Irish sovereign debt. The spread between 10-year Italian and benchmark German Bunds – a reliable indicator of how secure investors feel about lending to a government – reached a new euro-era record of 285 basis points before easing back to 269 points by mid-afternoon.

Indeed, courtesy of Bloomberg, this is what Italian government 10-year bond yields looked like on Tuesday afternoon:

The bond markets are closing for Italy, plunging the core of the Eurozone into crisis

The Eurozone is trapped, the cacophony of voices at the heart of Europe’s institutions is deafening, and thus in the absence of 12th hour dramatic new policies, the most likely outcome is a disorderly exit from the Eurozone for several countries, accompanied by disorderly debt defaults.

Demonstrating for the umpteenth time how constructive and self-sacrificial Greece has been in this crisis, Prime Minister George Papandreou has taken the unprecedented step of communicating with Jean-Claude Juncker, the head of the Eurogroup, via an open letter posted on the official Prime Ministerial website:

Our recent Parliamentary votes signal a renewed bold effort and strong political will to reach our goals.

Yet in no sense is our crisis over. Indeed, we together stand today at a fateful juncture in Greece’s and Europe’s ongoing economic adjustment program.

The markets and rating agencies have not responded as we had all expected. They continue to doubt (and therefore punish) our shared Greek and European reform program, and in so doing, are threatening Greece’s and Europe’s common recovery from the recession that began three years ago.

I am now convinced, after fourteen months, that no matter what Greece does-and we have proven ready to live up to our responsibilities—if Europe does not make the right, collective, forceful decisions now, we risk new, and possibly global, market calamities due to a contagion of doubt that will could engulf our common union. Strong and visionary European leadership is needed.

I say this to you because now there is a greater need to avoid mistakes of the past. “Crunch time” has arrived and there is no room for indecisiveness and errors such as:

– taking decisions that in the end prove ‘too little, too late’ to convince the markets we are serious;

– making compromises that satisfy our internal political ‘red lines’ that in the end substitute tactical politics for sound management of the crisis (although I do recognize the problems some governments have and the democratic demand for a greater say of Parliaments in trying to deal with this crisis);

– failing to use in-depth technical analysis and consultation before decisions are made;

– allowing a cacophony of voices and views to substitute for a shared agenda, thereby creating more panic than security;

– and I would add more global issues such as doing nothing substantive about the destabilizing role of the rating agencies, credit default swaps, tax havens or about plausible new revenues such as a financial transaction tax.

The above have in one way or another had profound effects on my country and others facing similar challenges.

When we see Eurozone leaders communicate with each other in open letters warning of “global market calamities” it surely feels like we are past the tipping point and into the first seconds of accelerating into a terrifying rollercoaster plunge. Who knows what is at the other end. History is being made (or undone, depending on one’s perspective)

It may now be far too late in the day to save the situation with a sudden burst of the missing leadership that Europe has been craving for. It therefore increasingly appears that a semblance of stability will only return to the countries that made up the Eurozone after some countries leave the Euro and a mountain of bad debts is recognized and written off.

Addendum

Here is an index listing of all the baobab 2050 Eurozone-related posts from late August up to early December 2010, almost all of which warned that the Eurozone crisis would ultimately escalate to nightmarish proportions:

27 Aug 2010: Contained Depression
03 Sep 2010: Irish Worries for the Global Economy
06 Sep 2010: The Lull Before the Storm
09 Sep 2010: The Return of the Stress
18 Sep 2010: The Chances of a Double Dip
19 Sep 2010: Irish and German Banks Insolvent, Banking Crisis to Go On and On
05 Nov 2010: The Return of the Stress (Act II)
16 Nov 2010: EuroJenga Blocks for Christmas
27 Nov 2010: Anyone for a Game of Dominoes?
27 Nov 2010: Global Jenga Blocks for the New Year
28 Nov 2010: Angela’s Haircuts Fur Alles
29 Nov 2010: The Eurozone Endgame: Four Scenarios
02 Dec 2010: Bond Markets in Holding Pattern, Waiting for ECB’s Turn at EuroJenga Table
04 Dec 2010: ECB Kicks the Can of Debt Deflation Down the Road

Here is a typical quote from the September 6th post “The Lull Before the Storm”, linked above:

…since the credit-fuelled growth of the last few decades was in fact a Ponzi scheme, we can intuit that the absence of growth is not merely a precursor to extended stagnation, but most likely the prelude to another collapse. Governments and taxpayers in Europe don’t have the means to restart the credit Ponzi scheme using the Paulson – Bernanke – Geithner formula that shut down the crisis in the US, partly because of the size of the European banking system (“too big to save”) and partly because Europe is in fact 27 sovereigns with conflicting interests. There will be fireworks out of this in Europe.

Comic Relief


The Euro Crisis Song
is very well done, and quite funny.