Italy at breaking point; fears grow of euro zone split

[scandal 951]

An ominous sounding news bulletin headlined ROME/BERLIN. Is this 2011 or 1938?

Meanwhile French bonds trading at all time premium to German 10years. Wow. Is it really game over in Europe?

Italy at breaking point; fears grow of euro zone split

ROME/BERLIN (Reuters) - Italian borrowing costs reached breaking point on Wednesday after Prime Minister Silvio Berlusconi's insistence on elections instead of an interim government threatened prolonged instability and kindled fears of a split in the euro zone.

European Commission President Jose Manuel Barroso issued a stern warning of the dangers of splitting the zone, rocked by an escalating debt crisis. EU sources told Reuters French and German officials had held discussions on just such a move.

"There cannot be peace and prosperity in the North or in the West of Europe, if there is no peace and prosperity in the South or in the East," Barroso said.

Italian 10-year bond yields shot above the 7 percent level that is widely deemed unsustainable, reflecting an evaporation of investor confidence and prompting German Chancellor Angela Merkel to issue a call to arms.

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 stays more loosely connected -- a signal that some members may have to quit the euro.

"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."

The European Central Bank, the only effective bulwark against market attacks, intervened to buy Italian bonds in large amounts but remained reluctant to go further.

Italy has replaced Greece at the center of the crisis and is on the cusp of needing a bailout that Europe cannot afford.

"Financial assistance is not in the cards," one euro zone official said, adding that the bloc was not even considering extending a precautionary credit line to Rome.

Having lost his majority in a parliamentary vote, Berlusconi confirmed he would resign after implementing economic reforms demanded by the European Union, and said Italy must then hold an election in which he would not stand.

He opposed any form of transitional or unity government -- which the opposition and many in the markets favor -- and said polls were not likely until February, leaving a three-month policy vacuum in which markets could create havoc.

Italian President Giorgio Napolitano said there was no doubt about the resignation of Berlusconi once economic reforms were implemented by parliament within days.

"Therefore, within a short time either a new government will be formed...or parliament will be dissolved to immediately begin an electoral campaign," Napolitano said.

Even with the exit of a man who came to symbolize scandal and empty promises, it will not be easy for Italy to convince markets it can cut its huge debt, liberalize the labor market, attack tax evasion and boost productivity.

Worries that the debt crisis could be infiltrating the core of the euro zone were reflected in the spread of 10-year French government bonds over their German equivalent blowing out to a euro era high around 140 basis points.

FRUSTRATION

Policymakers outside the euro area kept up pressure for more decisive action to stop the crisis spreading.

Christine Lagarde, head of the International Monetary Fund, told a financial forum in Beijing that Europe's debt crisis risked plunging the global economy into a Japan-style "lost decade."

"If we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand."

Berlusconi has reluctantly conceded that the IMF can oversee Italian reform efforts.

Euro zone finance ministers agreed on Monday on a road map for leveraging the 17-nation currency bloc's 440-billion-euro ($600 billion) rescue fund to shield larger economies like Italy and Spain from a possible Greek default.

But there are doubts about the efficacy of those complex plans, and with Italy's debt totaling around 1.9 trillion euros even a larger bailout fund could struggle to cope.

Lagarde said she was hopeful the technical details on boosting the European Financial Stability Fund (EFSF) to around 1 trillion euros would be ready by December.

Many outside Europe are calling on the ECB to take a more active role as other major central banks do in acting as lender of last resort. German opposition to that remains implacable, seeing it as a threat to the central bank's independence.

"The ECB will be drawn like everyone else by the weight of gravity (to act)," one euro zone official said.

"CORE" ZONE DISCUSSED

EU sources told Reuters German and French officials had discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone.

The discussions among policymakers in Paris, Berlin and Brussels raise the possibility of one or more countries leaving the zone, while the core pushes to deeper economic integration.

In a speech in Berlin, Barroso said Germany's gross domestic product could contract by 3 percent if the 17-member zone shrank and its economy would shed a million jobs.

"What is more, it would jeopardize the future prosperity of the next generation," he said.

Barroso said any push toward deeper integration should not come at the price of new divisions among EU member states.

GREEK DRAMA

With the markets' fire turned firmly on Italy, Greece's struggle to find a new prime minister became something of a sideshow, but one which demonstrated the difficulty in taking decisive action anywhere within the euro zone.

Greek Prime Minister George Papandreou said he was stepping down without saying who would succeed him as the nation heads toward bankruptcy, but party sources said leaders had agreed it would be the speaker of parliament.

Parties from left and right settled on veteran socialist Filippos Petsalnikos, barring-last minute snags, the sources said, turning to their own political class after ditching a plan to recruit a former top European Central Bank official.

The socialist and conservative parties had wanted former ECB vice-president Lucas Papademos to lead a government of national unity but he appears to have made demands about his level of influence which they could not swallow.

[Bad_Daddy 2,209]

Greece, Italy and Spain. Three Mediterranean countries where they like to sleep in and then sit around eating olives and drinking wine all day while the sun shines. Can't knock that life style, but it's not one to have when your a member of an economic zone that depends on your economy.

[Captain Oates 910]

People laughed about the lira for decades...

They need to sell their country to the Germans and then pay off their debts

The Germans can move to Italy and put the Italians in Ostfriesland then justice will be served

The only place where industry and thrift can flourish is somewhere with a Germanic based language where it is so cold you might as well work

That rules out Ireland/Greece/Italy (Iderlly)/Spain/Portugal so there is pattern

Look at England/Germany/Holland/Denmark/USA etc - the correlation is clear

Brazil will hit a brick wall next as it doesn't fit the definition on both counts

[Danno 1,228]

It seems to me the Euro set up over there is like a ship with no ability to seal off compartments in the event of flooding.

Every compartment takes experiences the damage.

[Captain Oates 910]

It seems to me the Euro set up over there is like a ship with no ability to seal off compartments in the event of flooding.

Every compartment takes experiences the damage.

The UK stayed out but 60% of it's exports go to the Euro zone so it will get hurt if the economy there sinks or the Euro sinks.

So staying out of the euro is no fire wall for any of us really

I spent today buying very cheap stocks in Siemens/BASF/Bayer etc - all of which are huge exporters and will benefit from a lower euro. If the euro goes down 20%, their profits will go up 50%

Its like the US stock market - the country can starve while the international stocks make record profits - and they are

[scandal 951]

It seems to me the Euro set up over there is like a ship with no ability to seal off compartments in the event of flooding.

Every compartment takes experiences the damage.

The trouble with Italy is not that it is too big to fail.

The trouble with Italy is that it is simply too big to bail out.

It has $2.6trillion in outstanding debt of which over 300 Billion EUR rolls over next year and 650 Billion EUR needs to be refinanced in the next 3 years. At current 7.4% rates that can't be done - $2.6 trillion in bonds will default and no IMF or ECB can engineer a bailout that large. The margin calls on Italian bond positions are coming fast and furious......

[Gary and Alla 3,694]

The US needs to be more like the Socialist Democracies of Europe, don'tya think?

[Captain Oates 910]

The US needs to be more like the Socialist Democracies of Europe, don'tya think?

Yes - with the rider that it should be Northern Europe

Germany is a far nicer, fairer and best dressed place than the US. Their education and science based industries are admirable and their economic performance when left alone in their progressive socialism are powerful and impressive.

Of course the right wing will use the macaronis as examples to try and smear all the 450 million people in Europe, but the fact is that much of northern Europe is or should be, the envy of the USA in low crime, education, skills, life expectancy, affordable health care and a million other areas

The right wing in the US will be sneering on the other side of their ten gallon hats when this southern Europe crisis passes and the US dollar plunges once again

[Mr. Big Dog 10,747]

Yes - with the rider that it should be Northern Europe

Germany is a far nicer, fairer and best dressed place than the US. Their education and science based industries are admirable and their economic performance when left alone in their progressive socialism are powerful and impressive.

Of course the right wing will use the macaronis as examples to try and smear all the 450 million people in Europe, but the fact is that much of northern Europe is or should be, the envy of the USA in low crime, education, skills, life expectancy, affordable health care and a million other areas

The right wing in the US will be sneering on the other side of their ten gallon hats when this southern Europe crisis passes and the US dollar plunges once again.

There are solid economies within Europe. Many of them much more solid that the US could even dream to be. You know, economies that actually produce something and export goods? Many exporting goods and services either roughly equal to or in excess of what they import. Which is what makes a healthy national economy. And they do this while working fewer hours, having superior social safety nets and taking care of the education of their next generation. They've surpassed the US in social mobility. And all that despite higher marginal tax rates and all.

[Danno 1,228]

Yes - with the rider that it should be Northern Europe

Germany is a far nicer, fairer and best dressed place than the US. Their education and science based industries are admirable and their economic performance when left alone in their progressive socialism are powerful and impressive.

Of course the right wing will use the macaronis as examples to try and smear all the 450 million people in Europe, but the fact is that much of northern Europe is or should be, the envy of the USA in low crime, education, skills, life expectancy, affordable health care and a million other areas

The right wing in the US will be sneering on the other side of their ten gallon hats when this southern Europe crisis passes and the US dollar plunges once again

Some might say: Thats like looking at a cancer patient and commenting: It's only the throat that effected, other parts of the body are doing fine.

And that is true, for now.

[Gary and Alla 3,694]

Yes - with the rider that it should be Northern Europe

Germany is a far nicer, fairer and best dressed place than the US. Their education and science based industries are admirable and their economic performance when left alone in their progressive socialism are powerful and impressive.

Of course the right wing will use the macaronis as examples to try and smear all the 450 million people in Europe, but the fact is that much of northern Europe is or should be, the envy of the USA in low crime, education, skills, life expectancy, affordable health care and a million other areas

The right wing in the US will be sneering on the other side of their ten gallon hats when this southern Europe crisis passes and the US dollar plunges once again

Sure and if we carved out a few of the troublesome states, the US would be much better off. Let's just amputate California, Nevada, Florida, Michigan, and Mississippi. See how much better it is?

Don't be silly. Germany's ability to support its own socialism AND Italy's will be strained when they aslo have to support Portugals, Spain's and Greece's. And if we go that route then how did the Euro Zone have any benefit at all?

[Mr. Big Dog 10,747]

Sure and if we carved out a few of the troublesome states, the US would be much better off. Let's just amputate California, Nevada, Florida, Michigan, and Mississippi. See how much better it is?

Actually, there would be a lot more cutting required. Best to cut all those states that take more than they contribute. Not only would that make the federal budget look a lot better but this would have the beneficial side-effect of us never having to worry about Republican Congresses or Presidents anymore. Ever.

[Captain Oates 910]

Some might say: Thats like looking at a cancer patient and commenting: It's only the throat that effected, other parts of the body are doing fine.

And that is true, for now.

A body can't live without a throat, but northern Europe can live without southern Europe - other countries sell olives

...and unlike the US, they are already discrete countries - think of it as they have already seceded

The bad boys wont be cut loose, they will have a new slum landlord - Deutschland - and ze chermans will sell their payday loans at bargain prices

Edited November 10, 2011 by Ashud Cocoa

[Mr. Big Dog 10,747]

A body can't live without a throat, but northern Europe can live without southern Europe - other countries sell olives

Northern Europe can still buy olives from it's southern neighbors. That doesn't require a common currency. They'd just have to pay in Drachma, Lira or Pesetas. It's been done before the EUR came about. Everyone going to Italy for vacation was a fcuking millionaire back then.

Edited November 10, 2011 by Mr. Big Dog

[The_Dude 1,142]

Actually, there would be a lot more cutting required. Best to cut all those states that take more than they contribute. Not only would that make the federal budget look a lot better but this would have the beneficial side-effect of us never having to worry about Republican Congresses or Presidents anymore. Ever.

Don't let facts get in the way of Gary's ignorance, he doesn't. Seems quite odd that someone who comes from a federal welfare state like Vermont, that takes more federal tax money than it pays would make a statement like Gary did.