Italy's president has apparently announced that Silvio Berlusconi will be stepping down, or calling early elections or something, after the country's parliament votes on new austerity measures. Stock markets have bounded upwards in riotous joy. By resigning, it's hoped that Berlusconi is making possible the tough fiscal measures that the country needs to halt the upward climb of its bonds.
It hasn't come a moment too soon. Their five-year bond yield was at 6.85% this afternoon--perilously close to the 7% "tipping point
" where other PIIGS needed to seek bailouts. This isn't just one of those psychological break points so beloved of chartists; among other things, it's around yields of 7% that traders have to start posting more collateral because the bonds are viewed as riskier. Obviously, if you have to post more collateral in your trades, the bonds are less attractive to buyers, which means you have to pay an even higher yield to attract buyers.
Especially since the Italian economy is really big compared to the other PIIGS, making bailouts from the already strained European stabilization fund harder to credibly arrange.
Berlusconi's resignation is supposed to convey seriousness about fiscal restructuring, a committment to making Europe work. The US equity markets certainly seem to be taking it that way. But what we really need to know is whether the market for Italian bonds feels the same way. As of this writing, I don't know.
Undoubtedly, both he and Panpandreu's new Greek unity government are buying the EU a little bit more time. But how much? The intervals between radical new plans, and renewed market chaos, seem to have been getting shorter and shorter.
To be sure, I'm a euro skeptic, and undoubtedly prone to look for confirmation of all my worst suspicions. It's entirely possible that we've finally hit upon game changers in Italy and Greece--real, credible, lasting committments to deep domestic reforms. If so, markets will probably whipsaw around for a while, and then settle down once they realize that yes, they're serious. The euro, the world economy, and even Barack Obama's presidency will be saved.
But at this point, I think another strong possibility remains: either that committment won't matter much to markets, or even unity governments will not be able to sustain them in the face of public resistance. At least as I recall, Argentina's government didn't abandon the dollar peg because they were worried about the opposition party being mean; they did it because they were worried about the riots.
Every world event has to have a tipping point, of course, but it's not clear to me which way this one tips. The political change is a big deal. But so are the underlying structural problems, and it's far from clear that they've been fixed.