Uh-oh: Europe looking worse than thought

GERMANY MAY BALK AT FURTHER BAILOUTS:

Economic advisors told the news magazine Der Spiegel on Sunday that the European Financial Stability Facility (EFSF) is only capable of helping smaller countries, not economies the size of Italy's.

Government experts say Italy's eurozone partners cannot cover the guarantee for Italy's state debt of over €1.8 trillion.

The report says Berlin is now insisting that Italy find its own way out of its crisis through budget cuts and reforms.

TELEGRAPH:

A funding crisis may have been of Italian making, but it would not be isolated to Italy. The eurozone would have to come to its aid. But Italy is not Greece. Italy's funding requirement this year is larger than the entire stock of Greek debt. It is the third largest sovereign debt market in the world, with €1.8 trillion of outstanding bonds. Rescuing Italy could stretch the eurozone to breaking point. Getting ahead of the markets was therefore vital, to kill the thought before it spread.

But then, the ECB joined in the game of brinkmanship. Instead of buying Spanish and Italian debt it bought Portuguese and Irish as rumours circulated that the two bailed-out nations were being rewarded for implementing austerity. It was an almost aggressive challenge to Italy.

According to Luc Coene, a Belgian member of the ECB's governing council, the central bank had not vetoed buying Italian and Spanish bonds, but it wanted both countries to take further action to earn central bank support.

"I certainly think the central bank is ready to take significant measures to help the situation," he said. "But first countries need to take measures."

If the ECB could claim victory, then, by forcing Berlusconi's hand, it would come at a high cost. Markets have lost faith in the political will in Europe to prevent an escalation of the crisis. Particularly as the events of the past few days have exposed the deep divisions in policy.

Four out of the 23 ECB governing council members, including powerful German Bundesbank chief Jens Weidmann, were reported to have voted against the bond purchases. ECB chief economist Juergen Stark and the Dutch and Luxembourg central bankers also apparently dissented.

BAILOUTS MUST BE UNANIMOUS.

WE WILL KNOW THE FATE OF THE USA AT 4AM , WHEN THE EUROPEAN MARKETS HAVE SET THEIR TOME FOR THE DAY.

STAY TUNED...