Mr. (Bond) Market Prepares to Take Down Silvio

Remember the 1997 Asian Financial Crisis?

The bond and currency markets took down Indonesia’s Suharto regime, which survived three decades of student protests, attempted coups, and external pressure.   What tanks couldn’t do, markets did.

With G-Pap now gone Club Med is in the midst of their own Arab Spring. Today’s jump in Italian yields with the credit curve looking to invert soon – a signal of growing default worries – is a clear call for Silvio Berlusconi’s head.   The guy is a proven survivor and has weathered 51 votes of no confidence in the Italian parliament, but we think it’s only a matter of days, if not hours, before he goes.  Hopefully replaced by a government of technocrats (see the Big Picture for background).

If this plays out, the markets will likely rip with a nut cracking relief rally until it is clear how ready and willing the Italians are for tough austerity measures. If no rally? More trouble and volatility.

EcoFin should build upon Mr. B.’s exit by providing more clarity on its steroid injections into the EFSF and Super Mario should give the new government a vote of confidence by stepping up ECB purchases of Italian bonds. Remember, this is all about restoring market confidence, which, thus far, the EU has failed miserably.

All hypothetical for now, but, in the words of the Great One, you gotta “skate to where the puck is going to be, not where it has been.”

Tough markets. Good luck.

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