Greece, Greece and more Greece. For the past two years that has been the main focus of the ECB and members of the G20. What can we do to prevent contagion? Should there be a structured default? That is still an issue, but now the Eurozone is waking up to a new concern. Italy. A core EU country, Italy is faced with a more dysfunctional government than Greece. Today it was announced the ECB would halt any furthers bond buys if the country did not implement promised reforms. Read – austerity.
Of course the promised reforms depend on the Berlusconi government, which let’s face it, is scandal plagued. His sex scandals make this week’s Herman Cain fiasco seem small. Mix in some inter-party fighting (Berlusconi trotted out the ‘you are a traitor’ chestnut) and you have all the makings of Greece 2: Bigger, and possibly even more unsolvable. Plus, the ECB gets the added bonus of the fact Italian debt is front-loaded over the next five years, with principal and interest coming due.
When asked if the ECB would stop buying Italian bonds if the country did not implement promised reforms, ECB Council Member Yves Mersch said, “If we observe that our interventions are undermined by a lack of efforts by national governments then we have to pose ourselves the problem of the incentive effect.” This was according to extracts from an interview slated for publication the Italian paper La Stampa on Sunday. Mersch also added it is not the job of the ECB to remedy policy errors on the part of politicians, clearly a shot at Berlusconi’s ruling coalition.
Threats from the ECB’s Governing Council have been considered idle. Greece has run roughshod over the ECB for almost two years due to default concern and contagion risk. It doesn’t take a team of IMF economists to figure out Italy would present even more of a danger to the EU.
This news will serve to push uncertainty back to the forefront. Financial stocks will be especially important to watch this next week. Bank of America Corp (NYSE:BAC) closed down more than 6% on Friday with 266 million shares traded. Citigroup Inc. (NYSE:C) finished closed the week down more than 1% and 39.9 million shares traded. Goldman Sachs Group, Inc. (NYSE:GS) closed down 2.45% on Friday with over 6 million shares traded. JPMorgan Chase & Co. (NYSE:JPM) closed Friday down 1.19% with 30.8 million shares traded. All of these stocks were down on below average volume on Friday as they followed the overall market lower.