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Wednesday, November 09, 2011


by Calculated Risk on 11/09/2011 03:34:00 PM

Although Italian Prime Minister Silvio Berlusconi pledged to resign, it is unclear when - and what will happen next. The yield on 10 year Italian bonds is at 7.25%.

Meanwhile in Greece, there is still no decision on a new Prime Minister or coalition government. Two rudderless ships ...

A few stories:

From the NY Times: As Italy’s Cost of Borrowing Surges, Europe Shudders

Italian bond rates crossed a crucial level of 7 percent, prompting questions about whether Italy could soon need an international bailout just as the financially strapped nations of Greece, Ireland and Portugal did before it.

The difference this time is that Italy, the third largest economy in the euro zone, is on a different scale than those other, much smaller European nations.
From the Athens Times: Coalition deal collapses; new meeting Thursday
A meeting of political leaders with the country's president has been postponed until 10am Thursday morning, the president's office has said, in a sign consensus on a new prime minister has yet to be sealed.

The meeting was called off after outgoing Prime Minister George Papandreou and opposition New Democracy leader Antonis Samaras began talks with President Karolos Papoulias on a new coalition.
From the LA Times: Italy at breaking point, Merkel calls for "new Europe"
[German Chancellor Angela] Merkel said Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait. "That will mean more Europe, not less Europe," she told a conference in Berlin.

She called for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stayed more loosely connected -- a signal that some members may have to quit the euro if the entire structure is not to crumble.

"It is time for a breakthrough to a new Europe," Merkel said. "A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive."
A few comments:
1) Europe has the resources to solve the problem, but not the political mechanism.
2) I'm frequently told by European analysts: Never underestimate the desire of EU policymakers to hold the eurozone together.
3) The ECB is just passively buying sovereign debt - and that probably will not change any time soon.
4) Other than the ECB, Europe probably does not have the mechanism to help Italy. The EFSF lacks the firepower.

A few other bond yields: The Greek 2 year yield is up to 108%. The Greek 1 year yield is up to 222%.

The Portuguese 2 year yield is down to 18.4% and the Irish 2 year yield is down to 9.2% (from 8.8%).

The Spanish 10 year yield is at 5.8%, the Belgian 10 year yield is at 4.4% and the French 10 year yield is down to 3.2%.