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We are officially in the danger zone. Carl Weinberg, the chief economist at High Frequency Economics, recently said the following about what would happen if Italian bond yields go up into the 8% to 10% range:
If it has to pay those yields to finance itself, Italy is dead, and the sovereign crisis just blew up.
So watch that number very carefully over the next few months. Italy is being called "too big to fail, too big to save". There is no way that Europe can afford to let Italy crash, but there is also no way that the rest of Europe can put together enough money for a full scale bailout of Italy. So there is panic in the air.
Many believe that the departure of Berlusconi is going to pave the way for brutal austerity measures to be imposed on the Italian people.
Suddenly, it very much feels like we are watching a replay of what has happened in Greece over the past couple of years.
The rest of Europe is in panic mode too. For example, France is desperate to keep its AAA credit rating. In an article for the Telegraph, Ambrose Evans-Pritchard described the austerity measures that France is implementing in an attempt to head off a debt crisis of their own:
The belt-tightening plan -- the second package since August, taking total cuts to €112bn -- include a 5pc super-tax on big firms, a rise in VAT on restaurants and construction, and cuts on pensions, schools, health, and welfare. It is the latest squeeze in a relentless campaign of fiscal tightening across the eurozone.
In the end, all of this is too little, too late. Europe is heading for a date with destiny. They have spent themselves into oblivion and now they are going to pay the price. Some members of the financial community fear that a full-blown crisis could erupt at any moment.
According to an article in the Financial Post, the Federal Reserve made the following statement in a report about a survey that it just released:
About one-half of domestic bank respondents, mostly large banks, indicated that they make loans or extend credit lines to European banks or their affiliates or subsidiaries
Big U.S. banks have a lot of exposure to European debt and to European banks. When the financial dominoes start to fall, a lot of those dominoes are going to be in the United States. One of the biggest dangers to be concerned about are all of the credit default swap contracts that U.S. banks have written on European debt.
Because financial institutions are not required to report their CDS holdings, little is known about which banks or investment firms are on the hook, and for how much.
At some point the whole thing is going to come crashing down. When it does, it is going to affect the entire globe. A huge storm is coming. Get prepared while you can.
