The chart at left shows the yield on the ten year Italian bond. It is at a Euro era record, and it is now a record 4.57 points higher than the German bond. The market basically finds these bonds to be very risky and so the market demands a huge premium for investment. This premium stands even though the European Central Bank purchased 70 billion Euros worth of Italian bonds in an effort to create a firewall between Greece and Italy in the event of a Greek default. Today, the ECB publicly threatened to halt such purchases. All of this means the bailouts are not working and the firewall around Italy has failed to contain the imminent Greek default. Meanwhile, neither Italy nor the G20 seems likely to take any significant action to address underlying Italian debt problems.
Greece is toast, and the only issue remaining is the extent of the default. Political chaos reigns in Athens and apparently the bailout requires a super majority approval of 180 votes in the Greek Parliament. Today, this appears dubious at best. Even if these hurdles can be overcome, the deal on the table is problematic at best, as developing nations like China balk at adding to the Eurozone bailout while France and Germany seem to have reached their political, economic and financial limits. The bottom line is that further bailout funding appears unlikely.
This is all unbelievably bad. Economists like Nouriel Roubini now see a significant risk of a Eurozone blow-up, with global financial markets following. On Sept. 24, I saw unlimited downside. Today, despite repeated efforts by everyone, the Eurozone situation is even worse. That is precisely what the above chart is saying.
Since Sept. 24, some degree of clarity regarding US exposure emerged. According to the Congressional Research Service the US financial sector has at least $641 billion in exposure to problematic Eurozone debt and $1.2 trillion in exposure to European banks. This also can only be termed bad news. If a Eurozone meltdown strikes, the US will get badly burned.