Calling time on bunga bunga won't save Italy or the Euro

Silvio Berlusconi has offered to resign but 10 year bond yields have crashed through the "point-of-no-return" 7 percent barrier signalling the start of the death spiral for the eurozone

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Game over for Italy and the Eurozone?
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Simon Miller
On 9 November 2011 09:44

So that’s it, end of the party?

As I write, Italian debt has passed the fatal 7 percent benchmark that led to Portugal and Ireland to seek a bailout.

Basically Italy cannot pay its bills. It is now too expensive for them to pay the interest on the loans that it borrowed to pay its debt.

Will Italy go bankrupt? No doubt Eurocrats are now looking at the European Central Bank’s balance sheet and debating whether to buy even more bad debt in the form of Italian bonds. 

Meanwhile, the bean counters at the European Financial Stability Facility will look at their screens and after a loud squeal will realise that they don’t have enough cash to step in.

And I doubt the International Monetary Fund will immediately step in to help either. The problem for the IMF is that its richer members are exasperated at the behaviour, and failure, of Europe in sorting out its own problems.

Perception is all. The UK has huge debt problems but the perception is that the UK is sorting this out, which is why our debt rate rivals Germany.

The problem is that Italy is just too big. Too big to fail, too big to save. It is Europe’s third largest economy and, according to some figures, the third largest issuer of debt in the world.

With debts of around €1.9trn (£1.63trn), something needs to be done but there is a suspicion that there is no political will to shove these vital reforms through.

Italy needs to raise €300bn in 2012 alone and basically, Italy is now on the tipping point. And as I wrote last week, with  French banks having £229.3bn in net claims in Italy, we should keep a close eye on France too.

In itself, Italy could possibly roll over debt agreements with creditors but it would come at an extraordinary price and it is highly unlikely that debt holders would trust Italy not to renege again.

There is the European Investment Bank, but politically David Cameron would be hard pushed to justify using this facility seeing that the UK is the largest shareholder.

So what now?

When Silvio Berlusconi promised to resign if the austerity measures are passed through the Italian parliament, gold went down on the news by $11.61 (£7.22) to $1,783.64 in New York last night - investors deciding to seek riskier vehicles.

However, it is becoming apparent that there is doubt that Italy can really deliver the cuts demanded by both the markets and the International Monetary Fund.

Remember that the Democratic Party abstained yesterday from the budget vote in a bid to oust Berlusconi. The vote still has to go through the upper house.

Although President Napolitano has the power to appoint an interim government, we will now see either a protracted election campaign or horse trading as a new coalition is formed.

It is the politics of Italy that is bringing it to its knees.

With Berlusconi talking about the need for an early election, it looks like Europe will not get the stable government that will introduce the cuts and reforms it demands.

It seems the party is well and truly over in Italy and it faces a torrid time of social unrest and market unease as some national unity is attempted. Traditionally, Italian politics has never been the most stable even at the best of times and, in the 150th year of nationhood, if the North decides it has had enough or if the political will to sort things out just isn't there, the markets will act accordingly.

Will this finally see Germany relent and allow the European Central Bank to become the lender of last resort?

I doubt it - despite Germany’s own relaxed attitudes to European legalities when it suited it.

With the fundamental flaws in the euro now exposed to all, we have to wait and see how exactly the eurozone is going to cope when the party animal that is Italy is lying on the floor with no cash for a cab home and the bank refusing to lend money.

It looks like this party could be over very soon.

Simon Miller is the Editor of Financial Risks Today. He tweets at @simontm71 

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