From a Greek Tragedy To An Italian Opera: Markets "Dislike" Silvio

From Greece to Italy, the fire keeps burning in Europe, just in a different country on the continent. There were rumors early this morning that Italian Prime Minister Silvio Berlusconi was going to resign, as first reported by Italian newspaper Foglio. This sent the Italian stock market, the FTSE MIB, soaring on the rumor. Not so fast though, according to social media. Then on all things, Berlusconi denied the resignation rumors, on his

Excuse the pun, but markets have "disliked" this. Over the weekend, it looked almost as if Greece is starting to get its act together, with Prime Minister George Papandreou inking a deal with the opposing party, and leading a transitional government of Greece. He has resigned, and it looks as if Greece will have a new prime minister relatively shortly, with one of the front runners being Lucas Papademos, the former deputy head of the European Central Bank. Greece is certainly not out of the water, but this is a positive step. While Greece

and may eventually default, the real issue is Italy. It has the third largest bond market in the world, (behind U.S. and Japan). Italy is way too big for the European Financial Stability Facility to save in its current form. It has approximately $250 billion in the EFSF already, and the Europeans, led by German Chancellor Angela Merkel and French President Nicolas Sarkozy want to leverage it up four or five times. No concrete details have been released how this is going to happen, and

well north of 6% now. If and when the Italian bond market goes bid-less, what happens to Berlusconi? Will he resign, or will he stay headstrong and refuse to resign, forcing even more confidence problems in the market? Berlusconi is notoriously hard-headed, and does not like being forced to do things, although he may have no choice. This morning, the Wall Street Journal reported that he was talking with his family over a potential resignation, but the situation is fast and fluid and could change at any moment. The European Central Bank is now run by an Italian, Mario Draghi, and he has already changed his stance from predecessor Jean-Claude Trichet by willing to cut rates to help foster growth, and not only worry about inflation. The ECB is also enacting its own form of quantitative easing by buying Spanish and Italian debt, but the ECB does not have the purchasing power to really make a dent in the Italian bond market to lower costs. At last look, the yield on Italian ten year debt was hovering around 6.5%, down from 6.6% earlier in the day, but that is still incredibly high for a country with nearly $3 trillion in debt. No country can sustain interest rates that high, especially when it can not print its own money to stave off default. If this is how Italy ends, with a Facebook post, it would be very apropos in this age of social media. Rumors are fast and furious, and will continue to be until something drastic happens in Italy, as well as Europe. Otherwise, the markets will continue to "dislike" what they hear. That's a status definitely not worth updating.

Traders who believe that the EFSF gets expanded to help save Italy might want to consider the following trades:

Traders who believe that nothing happens, and Berlusconi does not resign, may consider alternate positions: