Four days after the Italian elections, only one thing is really clear: A majority of Italian voters have rejected austerity.
The problem is, their victory came up short by the slimmest of margins.
That's the difference between a firm new government that could move Italy out of the Eurozone and the constitutional logjam Italian voters woke up to the next day.
Here’s why that's likely bad news for us all...
Four days after the Italian elections, only one thing is really clear: A majority of Italian voters have rejected austerity.
Since the beginning of the year, the markets have been behaving as if the Eurozone debt crisis has been magically solved.
Yields on Spanish and Italian debt are trading more than 1% lower than at their peak, while world stock markets have soared close to all-time highs.
Unfortunately, you can expect that all of this euphoria will fade when the Italian elections take place on February 23 and 24.
The reason is summed up in two words: Silvio Berlusconi.
European Central Bank President Mario Draghi warned about excessive euro strength at a press conference today (Thursday) following his announcement that the ECB had left interest rates unchanged, as expected.
In response to a reporter's question on whether there was a currency war in progress, Draghi said, "I think we should have in mind one thing: changes in the exchange rates that we see today are not really deliberate competitive devaluations. They are more the effect of macroeconomic policies that are meant to revamp the economies - for example, very low interest rates, promises to stay low for a very long time.
"However, if these policies produce consequences on the exchange rates that do not reflect the G20 consensus, we will have to discuss this."
Draghi said the exchange rate is not a "policy target" but is "important for growth and price stability," adding, "We certainly want to see whether the appreciation - if sustained - will alter our risk assessment as far as price stability is concerned."
Observers blogging and tweeting from the room where the press conference was being held felt Draghi was being very careful in choosing his words and interpreted this as a sign that he was, in fact, attempting to talk down the euro or at least slow its rise against other major currencies.
Traders immediately sold the euro against the U.S. dollar and against the Japanese yen. The euro is currently trading down about 200 pips against the U.S. dollar and is off more than 150 pips against the Japanese yen.
There is no doubt Draghi succeeded in halting the rise of the euro, at least for today. But if the ECB is serious about putting a lid on the euro's strength, its options are limited.
Because the ECB must take into account the laws and preferences of its constituent national central banks, it would not be easy to intervene in the foreign exchanges market - except in extreme circumstances - or to undertake a competitive expansion of the ECB balance sheet as the Fed and the Bank of Japan are doing.
The ECB could create new credit by purchasing private-sector assets, as the Bank of England and the Bank of Japan have done, but it is unclear how the conservative Germans would react to such a plan.
Or Draghi could just keep talking.
Markets rallied around the globe, especially European markets and U.S. markets.
But did you get what really happened?
I know you saw the rally, and I'm sure it lifted your spirits. It lifted mine for about a day - that is, until I lifted up the ECB's skirt to see if their provocative language would leave Europe's knickers in a twist or not.
If you're not the kind of person to look at such intimate things too closely, don't worry. I love all that stuff and am driven to know how all the bits and pieces come together or apart. So, I'll tell you what I saw up there.
Europe's knickers certainly are twisted. So much so that if an ill wind blows, everyone is going to see the naked truth.
Let me show you what I mean...
That's not to say this rule is infallible. One year, all the decision-makers went on holiday in late July, and came back to find themselves embroiled in World War I.
What traders and decision makers will find waiting for them when they get home from the beach could be almost as serious. Here's why...
A Laundry List of ProblemsGreece has done nothing to redeem its position other than prepare an application for more money. Italy's GDP declined by 0.7% in the second quarter, and we are shortly to enter the run-up to the next Italian election.
What's more, Spain is trying desperately to avoid asking for a bailout, and may just succeed in doing so, but one more hiccup in its recalcitrant provincial governments will push it over the edge.
Then there's Portugal, which has entered a deep recession, and is showing signs of missing its budget targets again.
And that laundry list of potential problems doesn't include the biggest one of them all.
To continue reading, please click here...
When Mario Draghi announced that he would do whatever he can to preserve the euro, it seemed that moment was imminent. Since he uttered those words on July 26, the IBEX 35 in Spain has gained 17%, while Italy's FTSE Milano Italia Borsa is up 13%.
But the rally may quickly fade.
Draghi and the European Central Bank have not taken any drastic measures since then and investors will most likely have to wait until the September 6 meeting to hear what's next.
On Monday ECB policy maker Joerg Asmussen played to the sentiment felt by many German officials that it might be time to let Greece go from the euro.
"Firstly, my clear preference is that Greece should remain in the currency union," Asmussen said in Germany's Frankfurter Rundschau."Secondly, it is in Greece's hands to ensure that. Thirdly, a Greek exit would be manageable."
However, Asmussen warned that a Grexit would be costly, not just to Greece but to the entire continent as well. "It would be associated with a loss of growth and higher unemployment and it would be very expensive - in Greece, Europe as a whole and even in Germany," Asmussen said.
These days, if someone even sneezes in Madrid, Barcelona, or Córdoba (one of my favorite places, actually), investors go into intensive care all over the world.
This new Spanish influenza has been wiping out paper value from one end of Europe to the other. This morning came word that many of the regions in the country will need help. Attention is now directed from focused support for banks to wider calls for a sovereign bailout.
And that is where the whole matter can turn nasty. Word is that we should now expect some Italian cities to be requesting money in the near future. Seems California and Pennsylvania are not the only locations where cities can go bankrupt.
The accord reached at the end of June by the Council of Europe (the EU member heads of government) to bail out Spanish banks is already derisively referred to as "bailout lite." As the beer commercials attest, this is going to be "less filling."
Unfortunately, it is the heavier version that Europe now needs.
Shortly after word came that Spain had formally requested a bailout package for its ailing banks, Cyprus chimed in and also asked for aid.
The Mediterranean country has become the fifth Eurozone nation to hold out its hand for an international rescue. While the smallest of the bunch to seek relief, Cyprus highlights the European Union's increasingly stressed resources as it wrestles with weakening economic conditions.
The aid request followed Fitch's downgrade Monday of the island's stressed banks to "junk" status. The credit cut means the country has lost it investment status with the trio of the largest and most influential rating agencies.
Fitch said in a statement, "Cypriot banks will require substantial injections of capital in order to secure confidence in their financial viability."
Cyprus, saddled with Greek private sector debt, could need as much as 10 billion euros ($12 billion) in bailout funds.
"Classic contagion, "BBC's chief economics correspondent Hugh Pym said of Cyprus' troubles.
Spanish economy minister Luis de Guindos formally asked Eurozone partners for up to 62 billion euros ($77.4 billion) to recapitalize his country's ailing domestic banks. The financial institutions are weighed down by bad loans to property and construction companies, and by an ongoing Eurozone debt crisis.
In a letter to the Luxembourg Prime Minister Jean Claude Juncker, who serves as head of the 17-nation Eurozone finance ministers, Guindos explained he wanted to settle on details and conditions of the loan before the next euro group meeting on July 9.
Juncker acknowledged receipt of the letter and said that the ministers expect to give a go-ahead to the European Commission, the European Central Bank and the European Banking Authority to negotiate terms of the bailout.
The request was anticipated after the results of two independent audits were released last week. Financial consultants Oliver Wyman and Roland Berger made the first step in a two-part audit of the Spanish banking system.
Wyman found that worst-case scenario, Spain's banking sector would need a bailout package of between 51 billion euros ($63.6 billion) and 62 billion euros ($77.4 billion). Berger estimated on the lower end with 51.8 billion euros ($64.6 billion).
The formal request for a Spain bailout has made investors more nervous, and is driving the bond yields higher, making it increasingly likely Spain will need more money to try and resolve its debt crisis.
But Greece's trials and tribulations are far from over, and the relief is temporary. Concerns are increasing over the global cost of a Eurozone bailout package as the mounting woes in Spain and Italy persist.
Citizens of Greece are clamoring for change, but many recognize that the election results are no quick fix. There was no cheering in Greece and global markets reacted cautiously following the vote.
Borrowing costs across Europe rose with Spain taking the lead. The yield on Spain's 10-year bonds spiked to a euro-era high of 7.18%. A reading above 7% raises a red flag that a nation may be approaching the need for a bailout.
Italian bonds also sold off on fears that if Spain is in need of a bailout, an Italy bailout package might not be far off. Italian bonds' 10-year yields are around 6%.
While the Greek election results staved off a calamity, they failed to fix the wider problems facing Greece and its struggling neighbors.
Moody's Analytics' chief economist Mark Zandi told USA Today, "We dodged a bullet, but they've got more bullets coming."
Now I understand that you probably don't follow Greek elections. But this is one you'll want to keep an eye on. At the moment, it dwarfs the contest between Mitt Romney and President Barack Obama.
In fact, come Monday it will be what every banker, politician and trader is talking about.
In the balance is the very fate of the Eurozone.
ripple effects could be enough to actually bring the EU down.
That's the first part of the story. Admittedly, it's not a very pleasant one.
The second part concerns your portfolio, since the solutions will involve more money-printing and, in the long run, more inflation.
But you needn't worry. We've already read the central banker's playbook for you.
In this case, the message is clear. Don't buy Europe. But do buy hard assets -- whether gold, oil, or other commodities.
These safe-havens are one of the best ways to hedge yourself against these characters and their money printing schemes.
Now that you know why Sunday is so important, here is how it will likely play out-in both the short term and in the long run.
An Italy bailout package is likely to be the next costly move in the spiraling contagion.
Italy on Thursday held its first bond auction since European finance ministers came to Spain's rescue, willing to give the ailing country up to 100 billion euro ($126 billion) to shore up its beleaguered banks.
The auction raised a heap of concerns.
Italy's borrowing costs soared following a Treasury sale of 4.5 billion euros of debt, including 3 billion euros of its 3-year benchmark bond that yields a lofty 5.3%. That was the highest yield since December and an increase of nearly 1.4 percentage points from the last sale just a month ago.
In addition, Fitch Ratings reported May 23 that foreign ownership of Italian debt slipped from 50% in 2008 to a current 32%.
"I think Italy could well be a problem, because its current government isn't very good and has no legitimacy, having been imposed by the EU - and it hasn't cut spending as it needs to," said Money Morning Global Investing Strategist Martin Hutchinson. "I'd put it a few weeks away though - market's focused on Greece and Spain at present."
Following the announcement of a $126 billion (100 billion euro) bank rescue package, markets rose briefly. But the relief was short-lived as investors hastily refocused and remembered that the struggling Eurozone still faces a number of key obstacles.
The Dow Jones Industrial Average lost 142.97 points, or 1.14%, to close at 12,411.23.
Spain's bailout package was assembled swiftly as EU officials attempt to stave off suppositions about the country's sickly banks with crucial Greek elections just a few days away.
But it falls short of resolving what the Eurozone as a whole is up against.
Banking analysts at Societe Generale summed up in a note to clients, "The plan looks like a classic Eurozone fudge."