If Rome burns, U.S. will feel the heat

The financial fires raging in Europe threatened to consume Italy Monday, as investors fled the country’s debt, driving up borrowing costs and pressuring Premier Silvio Berlusconi to resign. Unless those fires can be contained, the U.S. and the rest of the world will soon feel the heat.

After multiple failed attempts by Berlusconi’s government to reform Italy’s debt-heavy budget and after weekend reports that the government may fall, the financial markets pummeled Italian bonds Monday morning, sending interest rates approaching 7 percent. At those rates, the cost of periodically rolling over Italy’s $2.6 trillion in outstanding debt would quickly swamp its already strained budget.

Nearly two years after similar broken reform promises by Greece, the epicenter of the current financial crisis, the widening turmoil poses a much bigger threat.

"Italy has much more systemic implications than Greece, its debt is larger than the rest of the periphery put together, it is too big to fail, too big to save,” Thanos Vamvakidis, a financial market analyst at Bank of America Merrill Lynch. “The markets don’t believe Berlusconi at this point.”

Read the rest here.