Sovereign Debt Crisis Past the Point of No Return?

Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland, says the sovereign debt crisis has "gone past the point of no return.”

That has led to speculation the European Central Bank may had to step in bond markets in southern Europe are to survive.

Cailloux said about that, “The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”

Italy is far from the only concern, as Portugal is ready to collapse, and it's thought Spain may not be far behind them. There's also the uncertainty of Ireland if you want to look at the immediate risk picture.

Cailloux has called for the ECB to use what he calls its “nuclear option,” which would allow it to acquire government bonds from these countries directly.

Now that Greece and Portugal have already taken a big hit, with Greece debt being downgraded to junk status and Portugal taken down two notches, investors are seeing the handwriting on the wall and are starting to flee Italy and Spain as well.

This may even be why the bailout of Greece has been taking so long, as possibly the EU sees there is no way to bailout Greece without the rest of the at-risk countries coming to the table to ask for theirs.

That would be impossible for the member countries to do, and the reason the nuclear option is being thrown out as the only way to deal with the eroding situation.

Although the existing EU treaties normally wouldn't permit the action, there is a mandate within the treaties to allow the ECB to take these actions when there is a systemic crisis they're facing. That is obviously what is being faced now, and it'll be interesting to see how the people of the region respond to the enormity of the spending which would be required to bailout these countries, and once the consequences are understood, whether they'll support it or not.

There has already been a lot of backlash across the globe on the bailouts of the banks, but to bail out countries of this size will make that look like borrowing to build a lemonade stand.

Germany and its citizens will no doubt oppose this, as they already are seething about the idea of bailing out Greece, which was highly irresponsible in their monetary policy, and ultimately it would lead the EU to be considered an inflationary region; and it will no doubt be if this is what happens.

To me Germany has been right all along with this issue, and so has billionaire investor Jim Rogers, who has stated the EU should have allowed Greece to collapse in order to send a strong message that they're serious about the euro as a currency and that countries need to get their financial houses in order.

Now that that advice has been ignored and the nation of dominoes set in place, calls for the intervention by the ECB will probably and unfortunately be heeded, and whatever the European Union was before will never be the same; if it survives at all in the years ahead.