From Wolfgang Münchau’s regular column in the Financial Times, Plan D stands for default and death of euro:

The biggest single danger in the eurozone crisis now is that events are moving too fast for Europe’s complacent political leadership. Last week, the crisis reached Italy. And the European Union looked the other way.

Indeed. And with Italy firmly in the category of countries that are “too big to bail”, events from here on can only move even faster, leaving Europe’s political “leadership” hopelessly behind the curve and unable to respond.

Münchau zeroes in on exactly this point, that the contagion to Italy has completely changed the scope of the problem:

The crisis is moving too fast. Within a few weeks, the necessity moved from plan A to plan B to plan C. Plan A was austerity. Plan B acknowledges the need for debt relief, through some combination of a fiscal transfer and a contribution by bondholders. Plan C would widen the EFSF umbrella, to make it big enough to shelter Spain and Italy.

The EU is still fussing over plan B, and Germany rules out plan C. The hope among officials is that plan B will obviate the need for a plan C. That might have been the case four weeks ago. But why should a decision to inflict losses on banks help market sentiment on Italy now?

A rhetorical question, of course. How can it be a mere matter of sentiment when it appears that a Global Sovereign Debt crisis, which had been postponed for years, is finally breaking out? (chart credit – a blog post on FT Alphaville: Welcome to the Global Sovereign Crisis, says Deutsche)

Government Plus Financial Debt-to-GDP ratios (Chart by Deutsche Bank)

Münchau then explains what Plan D is:

My advice to Mr Tremonti is to confront Ms Merkel …. “D” stands for devaluation or default. To be clear, I am not saying that Italy should exit the eurozone. I am saying that Italy should prepare for that eventuality. In particular, Italy should signal to Ms Merkel that it can only remain a member of the eurozone if its interest rates are reduced. And I struggle to see that anything other than a eurozone bond can manage to achieve this.

There is more in the same vein in the latest post by Pater Tenebraum titled Euro Area – The Crisis Rolls On. This post also includes the latest collection of bond yield and CDS charts and is well worth a visit:

In spite of the slightly harsher than originally planned austerity budget that was passed by Italy’s parliament, markets continue to fret, as Italy’s debt threatens to enter the same death spiral that made it impossible for the ‘GIP’ trio (Greece, Ireland and Portugal) to continue to finance itself in the markets. This in turn redounds immediately on the banking system, which holds massive amounts of Italian government debt.

And so it has come down to this. On current trajectories of events, it appears that the fireworks I predicted last September 6th in The Lull Before the Storm are due to start no later than this Thursday’s emergency summit.

…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.