[Pheddytrourry]

Italy at Breaking Point, Merkel Calls for 'New Europe'

Published: Wednesday, 9 Nov 2011 | 1:16
By: Reuters

Portugal and Ireland were forced to seek EU-IMF bailouts when their borrowing
costs reached similar levels and clearing house LCH.Clearnet sounded another alarm
by increasing the margin it demands on debt from the euro zone's
third largest economy, effectively raising the cost of holding Italian bonds.



The European Central Bankspan#ExplainsLink a, span#ExplainsLink a img,
span#ExplainsLink a:visited img, span#ExplainsLink a:visited {border:none;} ,
the only effective bulwark against market attacks, wasted no time intervening to
buy Italian bonds in large amounts. "The ECB is buying aggressively,'' one
trader said.


Unlike Greece, an Italian default would threaten the entire euro project. EU
treaty changes could take a year or more. Rome does not have that much time.


Having lost his majority in a key 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.


"It is a step in the right direction,'' Swedish Finance Minister Anders Borg
said when asked about Berlusconi's plan to resign.


"There has been no proper understanding of the problems being faced in
Italy.'' 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.


"There is no guarantee (Berlusconi's) successor will be able to do a better
job.


Just keep your eyes on the Italian yield for now,'' Christian Jimenez, fund
manager and president of Diamant Bleu Gestion, said.


While Italian bonds blew out, 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 Fundspan#ExplainsLink
a, span#ExplainsLink a img, span#ExplainsLink a:visited img, span#ExplainsLink
a:visited {border:none;} , told a financial forum in Beijing that Europe's debt
crisis risked plunging the global economy into a Japan-style "lost decade''.


"Our sense is that 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 ... we could run
the risk of what some commentators are already calling the lost decade.''


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


Euro zone finance ministers agreed on Monday on a roadmap 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) span#ExplainsLink a, span#ExplainsLink a img,
span#ExplainsLink a:visited img, span#ExplainsLink a:visited {border:none;} 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.


German central bank chief Jens Weidmann, a key member of the ECB, rejected a
separate proposal to use national gold and currency reserves or IMF special
drawing rights to boost the bailout fund, welcoming opposition from Merkel to
the same.


But with the ECB just about the only buyer of Italian bonds, according to
traders, it will have to act more aggressively to contain the latest wave of
crisis, despite internal opposition to its bond-buying program.


Greek Standoff


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.


Prime Minister George Papandreou will meet the Greek president later, raising
hopes that party leaders may finally have come to terms on a national unity
government as the nation hurtles toward bankruptcy.


The aim is to establish a "100-day'' government to push a 130 billion euro
bailout plan, including a "voluntary'' 50 percent writedown on Greece's debt to
private sector bondholders, through parliament by February.


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.
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