One of the adventures of Odysseus and his crew was to pass between Scylla, the six-headed monster, and Charybdis, the whirlpool creating sea monster. They lived on either side of a narrow straight, so the path between them was considered near suicide.
That straight has long been considered the Strait of Messina between Italy and Sicily, and last week it became a very dangerous gap again.
Premier Mario Monti says he's "gravely concerned" that Italy's autonomous region of Sicily may soon default....It's a troubling development for a country that is trying to present itself as above the economic chaos raging in southern Europe.
Italian news reports say Sicily's government is €5 billion ($6.14 billion) in the hole and may soon be unable to pay salaries and pensions.
Still the news failed to make much of an impact on the markets because it was overwhelmed by much worse developments from Spain.
Concerns that Madrid is running out of options to bring down the debts of its ailing banks and bankrupt regions sent the country's borrowing costs soaring above 7.2% – a rate seen as unsustainable for a country that cannot devalue its own currency and is suffering a lengthy double-dip recession.There have long been rumors that Spain's regional governments were in trouble, but no real proof until Friday. Together with Spain's bonds being downgraded to junk and Spain's stock market having its worse day in two years, Friday could be considered the beginning of the end game for Spain in this crisis. Some newspapers in Spain even started calling it "Black Friday".
The bank bailout had been supposed to push down the country's borrowing rates, but the country's problems continue to mount. On Friday the region of Valencia was forced to turn to the Spanish central government for cash help.
The magnitude of the problem is starting to get so disproportional and uncontrollable that the Spanish Foreign Minister Jose Manuel Garcia, indirectly quoted the ECB as an "underground bank" that does nothing to extinguish the debt firestorm. He demanded that Europe should replace the ECB by a much stronger bank, sounding rather desperate. Mr. Garcia added that the Euro area will break apart before long if the gap between German and Spanish risk premium kept the same dynamics.It's now being reported that three more regions will also be asking for a bailout.
Spain, with a 24% unemployment rate, and a conservative government dedicated to austerity, is facing the same dilemma that Odysseus had - which bad option to chose?
Spain is not alone. Greece knows exactly what they are going through.
Greece could go bankrupt as early as September. Spiegel has obtained information that the IMF told the Brussels leadership it would not make more money available for help to Greece.Without the IMF the Greek bailout mechanism will not work. The money will not be there and Greece will default (again). The difference is that this time it will be chaotic and ugly.
The troika estimates that giving Greece more time to achieve its goals would cost an additional €10 billion-€50 billion. Many eurozone governments, however, are no longer prepared to shoulder new Greek burdens. Moreover, countries like Holland and Finland have made their help contingent on IMF participation.
This is happening the same week that Peter Doyle, former division chief in the IMF's European Department, sent a letter to the newspapers with some choice words.
"After twenty years of service, I am ashamed to have had any association with the Fund at all..."Meanwhile, Germany's economy minister, Vice Chancellor Philipp Roesler, said he’s “very skeptical” that Greece can be rescued by Europe's leaders and that Greece's inevitable exit from the Euro had “lost its terror.”
Roesler wasn't alone in feeling that way.
The leader of the main opposition Radical Left Coalition (Syriza) party, Alexis Tsipras, was quoted as predicting the country's default, while also forecasting that the government will "soon present" a return to a national currency (drachma) as a national success.If this feels a little different from the economic crisis of last year, it's because its starting to change. It's getting more serious.
The sight of protesters on Spain's streets is nothing new. Young "Indignados" (Indignants) protested in their thousands against mass unemployment last year.Recently a few people on DKos mocked me because I've been predicting a break-up of the Euro since early 2010 and it hasn't happened yet. There were similar doubters when I started predicting a housing bust back in 2005.
But since Prime Minister Mariano Rajoy announced the austerity steps last week there have been daily demonstrations drawing groups that have previously stayed away.
On Thursday, policemen and members of the Civil Guard took the unusual step of joining the protests.
"It has gone beyond an ideological issue... and it's moved beyond the traditional groups that demonstrate. We have seen even the military threatening a demonstration," said Ramon Pacheco, a lecturer in Spanish politics at Kings College London.
"It's difficult to make predictions, but it's more than likely that this government term could come to an end sooner than expected," said Fermin Bouza, a sociologist at Madrid's Complutense University.
All I can say isthat when you jump out of a 20th floor window you can say, "So far so good" as you pass the 12th floor, but it doesn't make it true.
If you want real proof of the panic in the financial markets, just look at interest rates.
Germany's 2-year bonds are auctioning off at negative interest rates of minus 0.06%.
Denmark's official interest rate is negative 0.2%.
Even Belgium, of all countries, is selling their debt at negative interest rates.
The Belgian Treasury issued three-month bills for EUR1.525bn at a yield of -0.016%.Low interest rates are a sign of confidence by the markets. Negative interest rates are a sign of panic in the markets. Or at least a serious dysfunction. No one in their right minds would pay someone to take a loan from them unless they were afraid of losing it all.
Germany, Netherlands, Finland, Switzerland and Denmark have also recently issued sovereign debt at negative interest rates as their securities are being seen as refuge assets against the European debt crisis.
As it stands right now, the next two months should show us how the European economic crisis will play out. Historically that is not good. From 1873 to 2008, September has traditionally been the cruelest of months for the markets.