Europe Scrambles To Deal With Italy Contagion Fallout, Calls Emergency Meeting As Former ECB Official Says "Very Worried About Italy"

As was reported last week, Europe has suddenly found itself shocked, shocked, that the bond vigilantes decided to not pass go and go directly to the purgatory of the European core, in the form of the country that, at €1.5 trillion euros, has more debt than even Germany, but far more importantly, has a debt/GDP ratio of over 100%, and has the biggest amount of net notional CDS outstanding (not to mention that it has dominated Sigma X trading for the past several weeks). Italy. On Friday we explained why things are about to get really ugly for the boot as a flurry of bond auctions is now imminent. Which is why it was not surprising to read that tomorrow morning the European Council has called an emergency meeting "of top officials dealing with the euro zone debt crisis for Monday morning, reelecting [sic; we assume Reuters means reflecting] concern that the crisis could spread to Italy, the region's third largest economy." Newsflash: the crisis has spread to Italy. And it will only get worse at this point as Spain is largely ignored for now (until its own mortgage crisis starts making daily headlines like this one, however, where courtesy of the insolvent Cajas which are simply a GSE waiting to be nationalized, the can will be kicked down the road for at least 6-9 months ) and the vigilantes start dumping Italian debt and buying up every CDS available and related to Italy. "We can't go on for many more days like Friday," a senior ECB official said. "We're very worried about Italy." But, but, didn't Draghi just say Italy's banks will pass the second, "far more credible" stress test en masse? Welcome to the second, and final, part of the European insolvent dominoes contagion, the one which culminates with everyone bailing each other out... and the death of the euro currency of course.

As a reminder, this is the key chart that matters vis-a-vis Italy.

More from Reuters:

European Central Bank President Jean-Claude Trichet will attend the meeting along with Jean-Claude Juncker, chairman of the region's finance ministers, European Commission President Jose Manuel Barroso and Olli Rehn, the economic and monetary affairs commissioner, three official sources told Reuters.

The talks were organized after a sharp sell-off in Italian assets on Friday, which has increased fears that Italy, with the highest sovereign debt ratio relative to its economy in the euro zone after Greece, could be next to suffer in the crisis. A second international bailout of Greece will also be discussed.

We reported on the UniCredit collapse, but here it is again:

Shares in Italy's biggest bank, Unicredit Spa, fell 7.9 percent on Friday, partly because of worries about the results of stress tests of the health of European banks that will be released on July 15. The leading Italian stock index sank 3.5 percent.

The market pressure is due partly to Italy's high sovereign debt and sluggish economy, but also to concern that Prime Minister Silvio Berlusconi may be trying to undermine and even push out Finance Minister Giulio Tremonti, who has promoted deep spending cuts to control the budget deficit.

"We can't go on for many more days like Friday," a senior ECB official said. "We're very worried about Italy."

Greece or Italy? Pick one.

Monday's emergency meeting will precede a previously scheduled gathering of the euro zone's 17 finance ministers to discuss how to secure a contribution of private sector investors to the second bailout of Greece, as well as the results of the stress tests of 91 European banks.

Back to "square one."

A senior euro zone official told Reuters on Friday that rather than progress being made in the talks with the IIF, as IIF managing director Charles Dallara has said, all sides were close to being "back to square one."

Dallara will attend the meeting of euro zone finance ministers in Brussels on Monday.

Since the euro zone's debt crisis erupted last year, the region's rich governments have aimed to isolate it to Greece, Ireland and Portugal, which have signed up to bailouts totaling 273 billion euros -- a sum that is small compared to the financial resources of the zone as a whole.

Spain, commonly seen as the next potential domino in the crisis, has managed to retain its access to market funding through fiscal reforms. But because of the large sizes of the Spain and Italy, pressure on the euro zone would increase dramatically if those countries eventually needed financial assistance.

Actually make that square minus one. So as Europe scrambles to convince itself it is not insolvent, America is doing the same across the pond. And when everything comes crashing down, as it will, once again nobody "will have been able to predict any of this."