The Italian (And Spanish) Job

While we were all neck deep in debt ceiling mess last week (and the Tea Party still managed to shoot the hostage in the leg) over in Europe, the Greek Fire spread to Italy and Spain, throwing those country's bond markets into complete turmoil.  The European Central Bank decided it wasn't going to bail out either country and leaned hard on Zee Germans to do it.  In turn, Zee Germans called the ECB's bluff and said "start buying up those bonds or we all explode."  Then the US got downgraded, and lo and behold the ECB is now very very happy to buy Italian and Spanish bonds.

The European Central Bank will intervene decisively on markets to protect Italy and Spain from an accelerating debt crisis, a monetary source said on Sunday, indicating it would buy government bonds of the euro zone's third and fourth biggest economies.

The agreement of the bank's policy-making Governing Council marked a watershed in the ECB's fire-fighting after modest bond buying efforts last week failed to stem contagion to the currency bloc's larger economies.

Officials on an ECB conference call carefully considered the situation in Italy and Spain, and took note of a statement by France and Germany on Sunday stressing their commitment to European financial reforms, the source said.

Translation, many hands make light work, or in this case leaves a lot more people to share the blame when this too blows up in Europe's face.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said they were committed to getting approval from their parliaments for new powers for the European Financial Stability Facility rescue fund by the end of September.

That will allow the EFSF to buy government bonds in the secondary market if the ECB thinks it is warranted and if euro zone member states agree, potentially absolving the ECB of the need to do so, a policy that a powerful minority of its council members strongly oppose.

"France and Germany are confident that the ECB analysis will provide the appropriate basis for secondary market interventions as it will help determine the case when financial stability of the euro zone as a whole is at risk," the leaders said.

By "new powers" it means "Hey, that QE2 thing America is doing?  You guys should totally do that, but since we're European we have to all pretty much agree on that."

At this point all the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain) have seen or soon will see serious bailouts.  If the contagion isn't stopped here and the PIIGS firewall is burned through, it's pretty much game over for Europe.  But at this point it's more of a matter of "when" and not "if" that happens.

If it blows up before the November 2012 elections here, things could get ugly.  We'll see.