This Bloomberg chart shows how the Italians have suffered in the sovereign debt crisis. While it doesn’t show the recent move above 6%, Italian 10-year bonds have indeed just moved over the 6% yield level. The ECB is the difference for Italy in this crisis. But the ECB simply will not buy more bonds as doing so takes the pressure off debtor governments to rein in spending, is seen as quasi-fiscal policy, and puts the ECB’s capital position at risk.

Andy Lees at UBS interprets this by saying:

10 year Italian yields back at 6% after German coalition sources said the EU summit will not reach any agreement of EFSF leveraging. All that heavy lifting done by the ECB now been undone. This should not be a surprise as the German SDP – (opposition party but the party Merkel has been relying on) – said in the Der Spiegel this morning that any such deal would need parliamentary approval.

Again, expect this to get worse before policy opinion is galvanized. And that’s not bullish for the euro zone economy.

Question: was Dexia the canary in the coalmine?

A large bank failure of that sort is breathtaking. Weeks before, no one was talking about Dexia as the weakest link. It passed the stress tests with flying colours. It was even touted as having the highest Tier 1 capital ratios in Europe. Then, suddenly it was in all kinds of trouble and simply collapsed.

It seems to me that we risk a true Armageddon scenario here from dithering.

This post originally appeared on Credit Writedowns and is reproduced here with permission.