The market struggles this morning to untangle the many strands of the Italian debt crisis

11/14/2011 1:10 pm EST


Jim Jubak

Founder and Editor,

Enough of a puzzle for you?

This morning to follow the Italian debt crisis you’ve got to untangle the results of today’s auction of Italian government five-year bonds, the progress of Mario Monti in forming a new government, the push back from the down but clearly not out Silvio Berlusconi, and the odd long-term focus from EuroZone leaders such as Germany’s Angela Merkel.

Ready? Here goes.

  1. Italy sold $4 billion of five-year bonds today. The amount sold was the maximum target for the offer and demand was 1.47 times the size of the offer. That’s up from 1.34 times last month. But the bonds were priced to yield 6.29%, the highest yield since June 1997 and up from 5.32% last month. The good news is that Italy can still sell government debt; the bad news is that it’s very expensive for the country to do so.

  2. Mario Monti, an economist and former European Commission for Competition, has agreed to form a new Italian government of non-politicians. The new government could be sworn in as early as Wednesday. Berlusconi’s People of Liberty party and most opposition parties have said they will support Monti’s government in the necessary confidence votes. This is good news compared to the option of no government at all or a government made up of Berlusconi leftovers.

  3. But there is no agreement, as far as the leaders of Berlusconi’s party are concerned, on how long the government will serve or what it’s policy goals should be. Angelino Alfano, leader of the People of Liberty party, has made it clear that he thinks a Monti government should limit itself to implementing the very limited reforms Berlusconi pledged to Germany’s Merkel and France’s Nicolas Sarkozy just before the G20 meeting roughly two weeks ago. Pass those measures and give way to a new election is the People of Liberty stance. And as Alfano said, “Berlusconi is not taking up gardening.” The danger, of course, is that given the splintered nature of the opposition Berlusconi would come in first in a new election—even if didn’t secure a majority.

  4. I think it’s fair to say that Italy is still in crisis, that bond markets are still poised to crush Italian bonds, and that Greece (Remember Greece?) is still deep in the woods. So what are EuroZone leaders proposing to head off the crisis? In an interview with the Financial Times over the weekend Jens Weidmann, head of Germany’s Bundesbank and a member of the board of governors of the European Central Bank, made it clear that he remains 110% opposed to the European Central Bank acting as lender of last resort in Europe. It’s up to political leaders to fix the crisis, he said. And what have those political leaders proposed? At a speech to her Christian Democratic Party’s annual congress German Chancellor Merkel said the solution to the euro’s crisis is closer political union. That may in fact be true in the long term but given that any closer union would require renegotiating the basic treaties that govern the European Union and the euro with as many as 27 nations, there’s a good chance that this project is completely irrelevant to the immediate crisis in Italy and Greece. And in fact, markets are likely to say, as they seem to be saying this morning, that if the focus remains on the long-term and EuroZone leaders don’t come up with some short-term solutions, the euro may never get to the long-term.

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