Europe Fiddled With Greece While Rome Burned

By FOXBusiness

For weeks global stock markets have surged up and down on news out of beleaguered Greece.

Fears that Greece will have to default on its massive 350 billion euro debt sent stocks tumbling.  Optimism that a huge euro-zone bailout can stanch Greece’s bleeding sent stocks soaring. Subsequent political upheaval in Athens tied to the bailout’s required austerity measures sent stocks plummeting again.

Continue Reading Below

All the while Italy and its substantial debt woes were hiding in plain sight.

No more. Stock markets fell sharply Wednesday on the realization – finally – that Italy’s debt problems are, if anything, far more serious than Greece’s. The Dow Jones Industrial average fell more than 400 points in afternoon trading, and the S&P 500 and Nasdaq markets were each off more than 3%.

A strong argument has been made for weeks that the so-called European “troika” – the European Commission, the International Monetary Fund, and the European Central Bank – has paid too much attention to Greece, which accounts for just 2.5% of the 17-member euro-zone’s GDP.

“That’s a big part of the problem,” said Peter Tchir, founder of TF Market Advisors in Connecticut.

Tchir said Europe seems to have only shifted its focus away from Greece because fiscal leaders are starting to realize there may not be enough bailout money left to rescue Italy. “But the markets will react far sooner than that,” he said, which helps to explain Wednesday’s selloff.

Precious weeks were spent last month crafting yet another emergency bailout for Greece, only to see that effort wasted when former Prime Minister George Papandreou sought a public referendum on the package. Political chaos ensued and Greek’s debt problems remain as combustible as ever.

Meanwhile, as all the attention was focused on Greece, it was hardly a secret that Italy’s debt was mounting by the day. But it wasn’t until late last week that Europe – and investors – began turning their attention to Italy’s much larger economy.

That focus became all-consuming on Wednesday, and with good reason.

Consider the following: Italy has a public debt of $2.6 trillion, or 120% of its total economic output. The yield on Italy’s debt has soared in recent months and the benchmark 10-year note hit a fresh euro-era high of 7.495% on Wednesday, according to an analysis by FOX Business. Traders have dumped the bonds out of fear that the value of Italian debt will continue to fall and that the country may be forced to default on its debts. In contrast, Greece, Portugal and Ireland, much smaller economies with smaller absolute levels of debt, took bailouts when their debt yields topped 7%.

The fear, said Tchir, is that Italy may be too big to bail out. Besides, German politicians are already reluctant to bailout Greece. A much larger bailout for Italy could well be out of the question

In the space of a few days, Italy’s political landscape has become as blurry, if not more so, than Greece’s.

After his initial defiance in the face of criticism from other European leaders, Italy’s controversial and long-time Prime Minister Silvio Berlusconi has agreed to resign. A budget vote has been scheduled for next week which could impose harsh austerity measures on citizens used to generous social benefits. With this important vote pending it remained unclear Wednesday who would replace Berlusconi to fill the power vacuum at a critical moment in Italy’s history.

Italy poses far greater risks for contagion than Greece, which many analysts have encouraged to cut its losses and simply default on its debt. A default by Italy is almost unthinkable. Italy’s economy, accounting for 17% of the overall euro-zone GDP, is far more important to Europe than Greece’s. And huge sums of Italian debt are held by virtually every major European bank, so a default on that debt would have a crippling effect across Europe.

“The options aren’t clear,” said Tchir.

Indeed. But at least people are finally paying attention.

What do you think?

Click the button below to comment on this article.