European Debt Crisis Udate: The Latest Update on Greece, Italy, and the EFSF

Here’s your update for all things Europe this morning...

In Greece, the struggle to agree on a Prime Minister for what is now being called the “100-day government” continues. Although the EU has given Athens a deadline to come up with a government that will, in writing, support the €130 billion bailout, the two primary parties have yet to be able to agree on who will lead the new coalition.

Recall that the primary purpose of the unity government is to (a) implement the reforms demanded by the EU in order for Greece to receive the next tranche of bailout loans, (b) ratify the EU bailout deal, and (c) take the country to elections.

It is expected that Athens will name a new Prime Minister today.

In Italy, Prime Minister Silvio Berlusconi continues to cling to power but is under increasing pressure to resign. Yields on the Italian 10-year government bonds traded at 6.63% this morning, which is up approximately 0.38% from Friday’s close.

The key is that yields over 6.5% are considered to be in “bailout territory” as this was the level that once breached caused Greece, Ireland, and Portugal to seek assistance from the EU/ECB/IMF.

A key test of Berlusconi’s support will likely come at today’s vote on public finances. Italy’s main opposition party has said they will abstain in today’s parliamentary vote. In addition, 5 members of Berlusconi’s ruling party have also said they intend on abstaining from Tuesday’s vote.

There are 630 seats in Italy’s chamber of deputies with a total of 316 votes need to carry a motion. At the October 14th vote, Berlusconi’s party won the vote by the slimmest of margins: 316-301. With today’s defections, there are questions if Berlusconi will be able to produce the 316 votes need to control the outcome.

Should Berlusconi lose today’s vote, it is expected that he will face a confidence vote later in the week.

Finally, European finance ministers have announced that they will roll out the beefed-up EFSF rescue fund next month. This leaves both Greece and Italy to fend for themselves in the bond market until then.

According to Bloomberg, European officials are consulting investors and credit- rating companies over two options for beefing up the rescue fund’s €440 billion in guarantees into as much as €1 trillion of spending power. The first option is to create a “first loss” guarantee for bonds while the second option is to create a public/private partnership to leverage the funds via an SPV.

 

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