Europe: The Confidence Game That Could Break the Bank

PHOTO: Outgoing Prime Minister George Papandreou leaves the presidential palace in Athens on Nov. 10, 2011.
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The word "economy" comes from the Greek "oikos," or "house." Lately, the global economy has been like a nightmare episode of "Holmes Inspection."

You know the one. The owner fixes one problem only to find a more insidious problem underneath. Confidence in the contractor quickly turns into fear of the unknown and soon a new floor turns into a new foundation. It all goes way over budget and none of it is to code. It's how big renovation projects go bad all the time and it's how troubled economies become economic disasters. Unfortunately, America doesn't have Mike Holmes to come to the rescue and make everything right.

While the trouble with the global economy may seem safely quarantined by the Atlantic Ocean and the boundaries of the European Union, Americans should be on high alert, because things could go from bad to unimaginably bad with one bad economic resolution "over there."

The big news of the past week was that Greece would get bailed out and be leaving the money pit of "This Old Economy." On this week's episode: Italy.

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Ah yes, just when the eternal optimists among us were beginning to feel slightly better about chances for a modest recovery, another international domino begins to totter and potentially threaten the fabric of the world economic situation, again. The Italian economy seems to be unsustainable and default on its sovereign obligations seems imminent. The situation in Italy is really much worse than the one that seems to have been resolved very expensively in recent weeks in Greece.

Italian debt has ballooned over many years and now stands at a staggering 130 percent of its GDP. In order to meet its obligations, Italy will have to borrow some €300 billion in 2012, about another 20 percent of the GDP. Unfortunately, even that unthinkable amount will barely sustain the status quo.

The bailout of Greece was accomplished by several public and private institutions, most prominently big European banks agreeing to take as much as a 50 percent haircut on their debt. In contrast, Italy is a much larger economy and likely cannot go down the same path. The stronger economies of northern Europe simply cannot afford to bail out the largest economy in southern Europe, especially with Spain and Portugal lurking behind Italy with similar problems.

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