BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Eurozone Crisis: Both Italy and Europe to Go Bust

This article is more than 10 years old.

It's not certain as yet, of course, but it looks like it's possible that both Italy and the eurozone itself are going to go bust. For rather different reasons.

That's the Italian bond yields as of this morning. Well above 6% and rising and if as and when it gets past 7% it's generally considered to be game over.

It does get worse though:

There’s been some focus on the 450bps spread “trigger” for margin on sovereign risk, applied to trades going through RepoClear at LCH Clearnet Ltd. It’s important to reiterate that this isn’t the spread of Italian debt to Bunds (which is already far north of 450bps) but to a specific benchmark index of French, German and Dutch debt. This spread remains at 419bps.

The problem is that as yields approach those sorts of levels then people will be selling the bonds in order to avoid having to increase the margin payments that must be made. An action which will, of course, lower prices and raise yields. So the deterioration just becomes self-reinforcing.

There has of course been other news as well today. A rumour went around that Silvio Berlusconi was going to resign which made the Italian stock market jump 2%. He then denied he had any intention of leaving and quite possibly by the time these pixels appear on the web he will have resigned, will not have, have and then come back again or any other combination of possible events.

All of which aren't really all that important as a result of this:

Eurozone finance ministers will on Monday night begin a frantic search for new sources of capital to boost the area's main bailout fund to €1 trillion after the US and emerging powers refused to commit fresh funds at the G20 summit last week.

In order to grasp this you need to understand the following. The EU proudly announced that they had a €1 trillion plan to save the euro. Tonnes and tonnes of money to make everything alright. And they did indeed have a €1 trillion plan: what they didn't have though was €1 trillion. The ECB cannot print it for them (almost certainly the best solution) because the ECB isn't allowed to do that. If the ECB did then there would be eruptions of anger from Germany at such an egregious breaking of the law.

The EU cannot tax it off the citizenry of Europe either. Firstly, they don't have direct tax raising powers and secondly, well, it would be about €2,000 per man woman and child and most of us just don't have that sort of cash lying around. Plus the politicians would probably like to retain both their heads and their innards, something they might not if they tried to tax everyone €2,000 to save Greece and Italy.

So the grand €1 trillion plan was that they would go off and borrow the money. Ask the Chinese, Brazilians, these sorts of people, for a little loan to tide the continent over. The reaction has been pretty much what you'd expect. Europe's coming down off a debt binge as truly horrible as any even rumour of an actor's cocaine and booze weekend and panhandling for more cash to keep it going gets about the same response in both cases.

So there isn't actually €1 tillion in the plan to save Europe. I think I'm right in saying that at present there's a few billion and that's it, the small change that was put into it to get the ball rolling. Like a street beggar putting a few quarters and a dollar bill into the paper cup.

So, Italy going over the edge, no money in the pot to stop it and.....well, what next? Unless the ECB does start printing money, whatever the Germans say, it's extremely difficult to see anything other than the collapse of the eurozone.