Mio Dio, Cosa Hai Fatto, Silvio?

The ever-wise markets seem to have skipped ahead in their script by a few countries, because today the world woke up to find Italy on the verge of financial ruin.  Or at least that's what everybody is saying the markets are saying.  Unfortunately, as long as everyone believes it to be true, it's likely to come true.

I find it suspicious that right after the Greek mess has been "resolved" that the Italian crisis would suddenly come to a head.  Shouldn't the agreement of the Greek parties to unite to screw the Greek people give everyone else at least a few weeks of relief?  Apparently not.  Nothing else about Italy's underlying financial condition, which isn't that bad, has changed since last week.  But sharply increasing yields means that whenever Italy has to roll some debt, which most indebted countries do on a regular basis, it will have to pay substantially more.  Thus the problem in Italy has become self-fulfilling.

The failure to resolve the crisis is mostly the European Central Bank's fault.  It has basically refused to do the job of a proper central bank, which is to regulate the macro economy for the greater good.  The origins of the crisis are much more structural, which quite a few people still don't understand.  But rather than do the right thing and forgive gobs of debt, or exit the Euro themselves, the core Eurozone countries may be to be planning to kick the GIPS countries out.  I can't see how that would be a good solution economically or politically.  Not only would it create immense amounts of ill will in the region, it would still leave the GIPS countries with their external debt denominated in a foreign currency.  That class of debt is the only justifiable reason for Greece not leaving the Euro that I can see, and forcing the issue on multiple countries at once couldn't possibly help.

If things do really unravel in Europe, which they haven't done quite yet, I think US markets won't entirely collapse due to flight-to-safety inflows.  I could easily be wrong about that, though.  But obviously a breakdown overseas would fall through to front-line jobs within weeks, and that would exacerbate what is already a crisis.

Update 2011-11-09: Italy's problems may very well be Silvio's fault.

Update 2011-11-10: Italy's bond sale was successful but at a rate that is a good deal higher than last year.