Analysis Quite what is actually happening over the Eurozone I can't actually tell you: it's not that things change too fast to write about them, it's that things change to fast to read about them. Berlusconi still PM? Italian bond yields over or under 7 per cent? That changes as often and as fast as Berlusconi does condoms. France to go bust or not? Greece still bust?
However, what I can give you is a quick guide to what will solve the problem.
Well, nothing that's actually possible or legal, anyway.
We've two different things going on here: insolvency and illiquidity. Insolvency is Greece: they're bust, that's all there is to it. It just doesn't matter how much austerity (read, firing people) Greece does, how heavy they get with tax evaders and the structural changes they make. They simply cannot pay the debts they already have. They're as bust as someone on £10k a year with a £50k credit card bill.
People who are bust should default, pay back a bit but not all of what they owe, and start again. Finally, 18 months after this was obvious to the financial markets, the politicians have deigned to notice. So Greece will default: unfortunately, the deal isn't good enough. Only the private sector is going to take the 50 per cent “haircut” and most of the debt is now owned by various public sectors that won't. So Greece will still be bust and will have to default again in the future. Better to do it once and do it right but the politicians haven't come around to that yet.
But insolvency is nothing new: Greece has been in default on its foreign debts for 50 per cent of the time since it declared its independence in 1822. It's also not a large default, we're talking about the entire financial system losing £100bn or so: sure, real money but it doesn't bankrupt everyone or melt all the banks. Painful and tiresome but it can be done.
The other problem is illiquidity: this is Italy's big problem. They've a huge debt, like Greece. However, as long as the interest they have to pay on it stays low enough, they can manage to deal with it. Most Italian government debt is owed to Italian households anyway. However, if those interest rates rise then they can't pay the interest on the debt and thus they'll go the Greek way.
You expect me to default? No bonds, I expect you to die
This doesn't happen overnight of course. For the debt is bonds, bonds that were issued years ago. The interest that must be paid was set when the bonds were issued, the current market price of the bonds doesn't change that. Except for one little thing. Governments almost never pay off debt (the UK has done so three times since 1945, a couple of years each time, under Atlee, Lawson/Thatcher and Blair/Brown when they were still following the previous Tory budget plans), when an old debt becomes due they issue new bonds and pay off the old with the new. And, of course, the new bonds have to be issued with the interest rate set by the market.
That's the problem Italy has: their old bonds might be paying 3 per cent or 4 per cent, they've €300bn they must refinance this coming year and the new interest rate is 6.9 per cent (7, 7.4, 7.1, erm, take your pick by the nanosecond) and if all of their outstanding €1.9 trillion in debt has to be refinanced at these higher rates over the years then they're all Greek. But they're not bust yet: they're only bust if they do have to pay those higher interest rates. Thus they're not insolvent, they're illiquid.
Our problem is that they've got to refinance debt each week or so, with some coming up that must be financed. And each week that they've got to pay these higher rates makes the move to insolvency more likely. So of course, each week that the high interest rates persist means more people sell the old bonds and the higher the interest rates go (bond prices and bond yields move inversely) and so we have a horrible positive feedback. Note that this is nothing to do with short sales, speculation, CDS or even bankers being bastards. It's very simply people saying: “I'm not buying that shit, they're going to go bust.”
We all thought that it was going to be Spain that went this way next but no, Italy it is.