These days we are seeing how the moment of truth is slapping Eurozone politicians in the face. The risk premium, i.e. the market's disdain for Italian debt is throwing the country, and therefore the rest of the Eurozone, into bankruptcy. Watching the Italian giant teetering on debt feet worth more than 120% of its vast GDP, Greece's bankruptcy may seem like child's play.
Nevertheless, this Greek problem, which could have been solved to a large extent with adequate EFSF financing, has already been enough to overwhelm European leaders, who have not even been able to coordinate this solution, which in the shadow of the Italian bankruptcy is nothing more than a trifle. Ironically, it is also an Italian who has had to deal with the isolation of Italian debt from the market in the last few hours: Mario Draghi, who recently took up the baton for the first time at the ECB, cutting interest rates at the very first step. This morning he was forced to order «aggressive» purchases of Italian 2-year and 10-year bonds, as reported by Reuters. And even with the ECB buying aggressively, at this hour the risk premium remains at levels higher than when Greece, Portugal and Ireland were bailed out. The problem, as Nouriel Roubini said yesterday, is that Italy is too big to fail but also too big to be bailed out.
Money is flowing out of European (especially Italian) and US stock markets, although for the moment there is not as much panic as in previous periods. Perhaps this is because it is becoming less and less clear that the destination for preserving money is the traditional developed sovereign bonds. A safe haven that is no longer a safe haven and that has been reduced to US Treasury debt and German bonds, with the permission of other smaller safe havens such as Switzerland, Canada, Norway, etc. And in this new normal where developed fixed income has lost much of its solvency and has become imbued with risk, a lot of risk, perhaps investment in healthy and growing corporates is the new paradigm of preservation. Perhaps this is why we are seeing increasingly shallower stock market panics and why Mr. Market is more inclined to price in any news that is not extremely bad.
As true as it is that in the kingdom of the blind the one-eyed man is king, in this kingdom of political insanity the Markets are the sanest. That's how bad we are, gentlemen. The next few hours will be critical, and the political collapse of Rome and Athens is a fact, shameful but real. Too real. And it is also the whims of fate that the cradle of the Greek and Roman civilisations is also the lethal origin of an economic and political project that was baptised at the time as European and Monetary Union. Alea jacta est.