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The Dominos Begin Falling

Just a little more than a month after stripping the United States of its coveted credit rating, Standard & Poor's has set its focus on struggling European debt addicts, downgrading the third largest economy in Europe—Italy. The cut was made with negative outlook, meaning that Italy will face further cuts soon if things don’t turn around, and, let’s face it—things aren’t turning around any time soon despite Italy’s best attempts to unveil a brand new austerity program.

Even despite the European Central Bank’s buying Italian bonds to drive down interest rates, Italian borrowing costs have risen steadily. With the third largest bond market in the world (second only to the U.S. and Japan), its downgrade is significant. The Financial Times reported the story early this morning:

“It also raised its estimates for Italy’s debt levels, assuming they would peak next year at 122.4 per cent of GDP, the second-highest in the eurozone behind Greece. Under its negative scenario, Italy would slip into a recession next year with debt to GDP peaking at 123.9 per cent.
“Italy unveiled a new austerity programme earlier this month in a bid to calm turbulent markets. But S&P expressed scepticism about the plan, saying the €60bn in cuts ‘may not come to fruition’ in part because it expects Rome’s market interest rates to rise.
“The downgrade may also spark a renewed outcry from European politicians over rating agencies. The European Commission has threatened the agencies with its third round of regulation since the financial crisis and talk has increased of setting up an ‘independent’ European rating agency, something seen with cynicism by many in banks and the markets generally.”

Yesterday, we commented on the Eurozone jumping into the fray as a gold buyer, but fears of a currency collapse are running rampant despite any last ditch efforts to own something other than worthless paper. While the focus has been on the euro as the weak link in the global monetary system, people have failed to zero in on the real culprit—the system itself.