Into the Danger Zone

Two days ago, the Financial Times published an article highlighting the fact that, with Italian bond yields at 6.68, Italy has entered "the danger zone." In response, Paul Krugman muses in his blog that "the next few days could be very interesting." And indeed they have been.

Yesterday, in an attempt to calm the markets, Berlusconi announced that he would resign once the Italian budget is passed. The S&P 500 rose yesterday after the announcement, encouraging observers to draw connections between the two events where there were none, confusing correlation with causation. And sure enough, the S&P opened more than 20 points down, erasing any gains that may have been related to the Berlusconi announcement.

But the importance of this metric in gauging Italy's troubles pales in comparison to that of the aforementioned bond yield. Italy has sunk deeper into the "danger zone" as yields increased to 7.4 today. It is clear that the prospect of Berlusconi's resignation did absolutely nothing to restore confidence in the Italian bond market. He has been a pitiful Prime Minister and a national embarrasment, but Italy's problems run deeper than one man.