A spike in Italian debt yields sent global markets tumbling Wednesday, with the Dow down more-than 370 points in recent trading.
Earlier this week, you may recall, talk on the Street was that if Silvio Berlusconi would only step down, the Italians would be free to adopt austerity measures and market pressures would relent. Instead, Berlusconi's pledge to resign seem to intensify market fears about Italy's huge debt load.
Yields on Italian 10-year debt jumped to 7.4%, a record for the euro era and a level at which other EU members, notably Ireland, Portugal and Greece have required bailouts.
From Berlin, German Chancellor Angela Merkel once again reaffirmed her commitment to the grand EU experiment, declaring: "It is time for a breakthrough to a new Europe. Because the world is changing so much we must be prepared to answer the challenges. That will mean more Europe, not less."
As Jeff Macke and I discuss in the accompanying video, less Europe might actually be more and "more Europe" seems pretty nutty at this point.
Kidding aside, the reality is with $2.6 trillion of debt, Italy is too big to bail out unless the European Central Bank does an abrupt policy shift and decides to monetize Italy's debt, aka "pulls a Bernanke."
Merkel also said the situation in Europe has become "unpleasant," Reuters reports, which is an early leader in the "understatement of the year" category.
As to where the market goes from here, Macke says S&P 1220 represents important near-term support and that a retest of the October lows near 1110 may be in the cards "but that's not today's business."
Indeed, stocks are still a long way from the October lows today but there's plenty of other stuff to worry about.
- Silvio Berlusconi