A week would not be complete without a survey of the European debt crisis. The continuing gravity of the crisis was illustrated by the fact that major European bankers had to postpone their vacation plans to hold an emergency meeting on Thursday. Outgoing Spanish Prime Minister Jose Luis Rodriguez Zapatero will also have a truncated vacation, whereas Italian Prime Minister Silvio Berlusconi gave a speech before Parliament in an attempt to reassure the financial markets about his country's economic stability.
What touched off the latest bit of nervousness was the surge in Italian and Spanish bond yields to 14 year highs topping 6%. These large economies dwarf the relatively small economies of Greece, Portugal and Ireland that have required bailouts. A default could prove a fatal blow to the euro and European Union.
Silvio Berlusconi blames the crisis not on fundamentals in Italy but on a general global skittishness, saying "this is not an Italian crisis, but a planetary one." Berlusconi highlighted the stability of the Italian banks (unlike Ireland's) and the low level of personal debt (as opposed to Spain). Italians favor cash transactions a tendency that goes hand-in-hand with income tax evasion but it does help avoid maxed out credit cards.
The head of the EU commission, Portugal's Jose Manuel Barroso, claimed that the market jitters were a sign that the EU member states should act quickly in passing the necessary legislation agreed upon at an emergency summit in Brussels last month. However, while bankers and prime ministers can abbreviate their vacation, the same does not hold true for national parliaments who are on summer recess.
Adding to the crisis was a prediction from a British think tank, the Center for Economics and Business Research, that projected an Italian default. Germany's Deutsche Bank has sharply reduced its holdings of Italian bonds and this has not gone unnoticed. aI
In a sense this is a repercussion of the European summit decision that staged a camouflaged restructure of Greek debt, forcing the banks to absorb part of the pain. This move sent a signal to the banks that the precedent set with regard to Greece could be repeated in future crises. They they did not want to be left holding the bag and the Italian bonds.