Italy needs money, pronto. But can the European Financial Stability Facility (EFSF) cope with such stupendous demands on its reserves?
Or put it another way: is Italy really too big to fail? (Or too big to save?) Let's tot up interest payments at 7%. Owing the best part of €2trn - that's trillion - Italy can expect to pay around €70 billion in interest alone. Quite a handy amount.
Reasons to be fearful?
The European Financial Stability Facility (EFSF) was designed to stump up for the eventualities of a bail-out, but not on the scale of Italy. The European Central Bank is already thought to have been helping Italy out by buying some of the government debt, but only by a fraction, thought to be around 5%.
So, were the EFSF to step in to Italy's aid, how soon could the fund itself be emptied? Could it be emptied? "In practice, I don't' think so," says professor of finance Gulnur Muradoglu at Cass Business School. "Funds are like living creatures, they get replenished as you use them. By the time you are using it you are simultaneously replenishing it."
Big heartedMuradoglu says replenishing the fund (and it will inevitably be replenished) is not just big-heartedness from Germany; it's in Germany's interests to do so. "From the start [of the EU], the larger the economy, the more vested interests it has in keeping Europe together." What is making the situation more difficult this time is that though Berlusconi resigned, there is no clarity on a new Italian government.
Italians can draw a measure of comfort that this morning Italy managed to flog €5 billion of new debt, though at a price; investors charged more than 6% on one-year bills. That's the highest amount for more than 14 years and getting on for double the price of bills auctioned just a month ago. However, the European Central Bank may have been supporting this sale - we don't know.
JittersAnother element here is that when short-term debt costs rise so fast, it signals that the market takes an even dimmer view of the long-term situation. And the longer the governmental vacuum continues, the more the markets will be rattled. On the plus side, you could argue that Italy's problems are more about liquidity rather than, like Greece, being completely broke.
Expect Germany and others to stump up, then. Currently the European Central Bank (ECB) is not allowed to shore up single countries simply be churning out more euros, but this role may change.
A bigger EFSF bazooka looks inevitable, though not before a lot of arguing and wrangling on how exactly to fund it. Italy is not too big to save. But only with ECB help.