Italy: Time for the ECB to Show Its Hand

The ECB will eventually end up with a more open-ended commitment to buy peripheral European debt. However, it will probably take further turmoil to achieve this. Once the ECB acts as lender of last resort, its balance sheet expands and the quality of its balance sheet deteriorates, leading to a fall in the euro. The weaker euro, in turn, makes QE3 in the U.S. much more likely.