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Draghi's pledge to do what is necessary, within the ECB's mandate, to save the euro reduced the extreme tail risk in the eurozone. Greece is about to receive a large dollop of aid so it can continue to keep its public sector creditors whole at the expense of domestic financial institutions.

While the risk of a Grexit, which many thought was so imminent, has receded, euro skeptics have turned their attention to Spain and/or Italy.

The Wall Street Journal reports of a euro skeptic hedge fund note warning of a 40% chance that Spain leaves EMU 2014-2015. Some economists have also identified rising unemployment as the breaking issue.

Italy, though, is poised to leapfrog ahead of Spain. A couple of large banks argue that Italy, more than others, has much to gain leaving the EMU. It highlights its diversified economy and its modest primary budget surplus (~3.5% this year and projected to be closer to 5% next year).

Until this past weekend, the market had anticipated that the pro-EMU forces, the center-left PD, would lead a coalition that would continue the broad path that Monti set. In fact, there were some in Rome who suggested that under a PD-led government, Monti could become the next Italian President. A hung parliament could have resulted in the parties turning again to Monti as technocrat or as the head of a "national unity" government.

These scenarios were dashed by the withdrawal of support by Berlusconi's PDL. Berlusconi is nothing if not an astute diviner of the public mood. The harshest criticism Berlusconi has for Monti and one that strikes a very responsive chord among Italians is that he is doing Germany's bidding.

Berlusconi is gambling he can run against Merkel. An outline of his strategy can be gleaned from the latest FT/Harris Poll: 83% of Italians (surveyed) think that Germany has too much influence in the EU, up from 53% a year ago. Nearly three-quarters of Italians do not think Germany is doing enough (55% of Germans think they are doing too much). Three-quarters also do not have confidence that their government can handle the debt crisis. Two-thirds of Italians think there has been too much austerity.

There is no love lost between Berlusconi and Merkel, who he had made some insulting personal comments about just before Berlusconi was forced out in November last year. It seems to be a bit over the top to claim, as at least one journalist does, that Berlusconi was toppled by a German and ECB putsch. A putsch implies secret and illegal plan. It was far from secret and it is not clear what law was violated.

Although pressure on Italian bonds and stocks were immediately evident when the political news first broke, investors seem a bit calmer late yesterday and today. That said, the CDS market has not shown the more relaxed mood. Italian 5-year CDS price jumped from 230 at the beginning of last week to 291 yesterday and is near 290 currently. Italy was 40 bp below Spain at the start of last week and is now about 14 bp below. The cost of insuring Italian exposure is likely, we think, to rise above Spain. This has not been the case since late February.

Source: Berlusconi To Run Against Merkel