James Saft is a Reuters columnist. The opinions expressed are his own.
It looks as if we will need to see some kind of miracle intervention from the European Central Bank — a Deus ex ECB — or the euro zone is heading for a nasty divorce.
Either the ECB comes across with a mandate-busting rescue, probably involving direct lending to Italy and rolling the currency printing presses, or the forces aligned against currency union will roll over Italy and into France.
Italian political chaos and a move by some clearing houses to demand more margin on Italian debt helped to drive 10-year yields of the troubled sovereign borrower to a euro-era record of 7.5 percent on Wednesday. The market appears to doubt that the EFSF rescue fund will be big enough and operative enough to back Italy effectively.
The sheer size of what would be required to backstop Italy, which has the world’s third-largest bond market, throws doubt in turn on support for Spain, whose bonds are also selling off, and the ability of France to maintain its AAA rating, without which Germany is left alone as the bulwark against a gigantic bank run.
The ECB has been buying Italian bonds in the secondary market but still sees itself as only providing transitional support until other European rescue initiatives can take its place.