ROME — The European debt crisis appeared to claim its most prominent victim on Tuesday when Prime Minister Silvio Berlusconi of Italy, cornered by world markets and humiliated by a parliamentary setback, pledged to resign after Italy’s Parliament passes austerity measures demanded by the European Union.
Although Mr. Berlusconi’s exit was not immediate — weeks of political wrangling over the austerity measures probably lie ahead — political commentators said they could see no escape this time for the prime minister, whose Houdini-like ability to wriggle free from scandals is legendary.
But the biggest problem is that Italy has no firewall. This is critical. Greece, Ireland and Portugal were all small enough to bail out once their problems became overwhelming, even if a new funding vehicle, the European Financial Stability Fund, had to be created to do so.
But Italy is the world’s eighth largest economy. There’s a reason, in the words of so many, that the Eurocrats last month all of a sudden seemed to “get it.” That reason was Italy. They were scrambling to erect a wall around Italy, to protect it from the Vandals and Huns that threaten to sack not just Rome, but the whole of Europe.
Yet the rally-inducing “comprehensive plan” unveiled in October to save Europe remains nothing more than some notes on paper. The critical part here wasn’t cutting Greek debt, but raising enough money to “ringfence” Italy.
They haven’t found it. The Chinese turned them down. The IMF turned them down. There is no new money in the EFSF; there is no levered-up super fund. Forget three months. There is nothing in place now, today, and Italy is on the verge of a meltdown now, today.
This is getting worse, not better, but the markets continue to have blind faith that somehow, some way, the Eurocrats will come through with a solution. Find a silver bullet. Discover a miracle cure. Get the Chinese on board.
It’s fine to hope for something like that, but make no mistake, the hour is getting late. Very late.
In a note out this afternoon, Goldman Sachs’s Francesco Garzarelli sets out three possible scenarios for what will happen next, from most to least likely:
1) A coalition based on Berlusconi’s old coalition would ally the parties that supported him—Northern League and the People of Freedom—and reach out to a few smaller parties. This coalition has already shown support for EC/ECB/IMF austerity measures, but it will need to do a better job in order to be an improvement from Berlusconi. Sovereign bond yields would remain around current levels.
2) A coalition of centrist MPs would form a “technocrat” government. This could produce a government more amenable to reforms that encourage growth and improve governance. Markets would approve of this kind of coalition and bond yields would fall quickly by 50-100 bps.
3) General elections are called after Berlusconi’s resignation (which will likely take place once the 2012 budget is passed next week) for January at the earliest. This would be the worst-case scenario for markets.
However, Garzarelli notes that all of these outcomes will take time:
We are most probably approaching the highs in Italian yields (currently around 500bp over German Bunds in the bellwether 10-yr sector, and 600bp in 2-yr maturities), but a volatile and unsettled market remains our base case until Italy’s sovereign creditors can be reassured that long-awaited structural reforms to lift the country’s growth rate will be put in place.
ATHENS — Lucas Papademos, a respected economist, seemed on the verge Tuesday night of being named Greece’s next prime minister, Greek news outlets reported, but party leaders were still engaged in a bitter and drawn-out fight over the makeup of his cabinet.
By late afternoon, Greece seemed to face yet a new set of troubles as Antonis Samaras, the leader of the main opposition party, New Democracy, balked at a demand by Eurogroup, the European Union’s group of finance ministers, that several top Greek leaders give a written commitment to the terms of an expanded bailout hammered out with Europe’s leaders last month.
BEIJING (AP) — China’s stubbornly high inflation fell in October, giving Beijing room to stimulate the world’s No. 2 economy amid weak U.S. and European growth.
Consumer inflation declined to 5.5 percent from September’s 6.1 percent as double-digit rises in food costs slowed, government figures showed Wednesday.
Lower inflation gives China’s leaders leeway to reverse interest rate hikes and other curbs imposed to cool an economy that grew by 9.1 percent in the latest quarter. Those controls squeezed entrepreneurs and fed fears the economy might slow too abruptly at a time when hopes are pinned on China to prop up global growth.
Second day of the week, second day of gains for the S&P 500 — call it the Berlusconi arrivederci rally. The index posted a 1.17% advance, which put it back above the 200-day moving average. It is now in the green year-to-date, up 1.45%, but it is still 6.43% below the interim high of April 29.
Economics:
- At 9:30 a.m. ET Ben Bernanke speaks about small business and entrepreneurship.
- At 10:00 a.m. we get wholesale trade inventories data for September.
- At 12:15 p.m. Fed Governor Daniel Tarullo speaks on financial regulation.
Earnings:
- Before the bell, we get results from Dean Foods, Ralph Lauren, Computer Sciences.
- We later hear from Macy’s.
- After the bell we hear from Cisco Systems.
Tonight, I went and saw a group that my 2 year old daughter turned me on to. Yo Gabba Gabba. These guys are some sort of post punk/ acid rock collective from Brooklyn. Costumes, light show, the whole thing seemed very experimental but the crowd full of toddlers seemed into it, good times. They played all the classics, mixed in some of their newer stuff and had a great encore with Sunday Bloody Sunday The Goodbye Song. They’re on my teevee alot these days, but they’re really a group you need to see live. I hope these guys keep it real and don’t sell out, or worse fall into hard partying habits that drain their production like so many other groups (Brobie, the furry green one with long arms, looked a little out of it after the intermission… not sure what they were up to backstage.) Here’s some video I took of one of their hit songs It is Fall: