By: Christopher Lewis

The Italian bond market is probably something that most Forex traders don’t pay much attention to. However, the 10 yield Italian bond has suddenly found itself a very important player in the Forex world.

The promise of a resignation by Italian Prime Minister Silvio Berlusconi temporarily gave the risk appetite of global markets a lift, but this was very short-lived. The credit markets are awash with the bodies of those that thought the PM’s leaving would fix the situation though. The bond yields are now at an all-time high since joining the Euro, and quite frankly only stopped at 7.25% area after significant ECB buying of the paper.

With these yields in the bond markets, and the credit markets starting to show signs of real strain going forward in Europe. This should continue to plague the Euro, but it must be said that the currency has be extraordinarily resilient over the last several weeks. Because of this, there might not be a meltdown as quickly as these issues would dictate. The market seems to be nervous about this Italian situation, but it is hard to think that all of the ramifications have been factored in at this point in time as the Euro seems to be fighting tooth and nail.

There will be a point where the entirety of the market “gets it” though. The debt of Italy is larger than Spain, Portugal, Ireland, and Greece combined. Quite frankly, it is simply too large to bailout, and too large to fail. The real lynchpin is in Rome, as the French are heavily exposed to Italian debt, and this turn of events could cause a downgrade of French debt. If this happens, the “backstop” of Europe suddenly becomes one country: Germany. There is even talk that if it does act in this manner, it would lose its credit rating as well. This would simply be a disaster for the common currency. We are entering the most dangerous phase of the EU debt crisis it seems.