EU President Calls Emergency Meeting , Italy is suddenly a crisis country.

EU President Herman van Rompuy has called an emergency meeting for Monday to discuss the Italian contagion, according to Reuters.

A combination of economic and political factors has seen a sharp selloff in stocks, and a surge in yields.

The country is also getting caught up in a continent-wide game of chicken, that started, really, when French banks broached the idea of haircuts for Greek debt holders.

A recent strategy note from Duetsche Bank's Colin Tan and Jim Reid nicely summarizes the state of play in Europe, when it comes to Greece, the rest of the PIIGS, and the bailouts:

Although it was another day of rule changes in Europe (ECB suspending the minimum credit rating threshold on Portuguese bonds following Moody’s downgrade) it was surprising just how firm Trichet was about how the ECB would not stand for a PSI (private sector involvement) solution that triggered a 'Selected Default' rating from even one rating agency. The banks and EU officials made no progress yesterday so we still have no final word on specific mechanics around the PSI require to secure a second Greek bailout. Perhaps as suggested by the Dutch Finance Minister yesterday it was “unrealistic” to expect significant voluntary participation as he called for mandatory participation even if it led to credit rating downgrades. Clearly as the facts and circumstances change so might the ECB's current hard line stance but we believe they are clearly trying to ensure that those negotiating are left in no uncertain terms as to their position. It will be interesting to see who blinks first? The governments, the private sector, the rating agencies or the ECB?

It seems the events of the past two weeks -- which have seen major deterioration in Portugal in Italy -- has really spooked Europe over this idea of private sector haircuts.


TOO BIG TO BAIL: European Rescue Fund Can't Handle An Italian Crisis

The Italy hits keep on coming.

The latest: According to Reuters, an ECB source is telling German newspaper Die Welt that the existing European Stability Mechanism isn't large enough to handle an Italy bailout, and would need to be made much larger were Italy to go.

This is how it happens, folks. A little nervousness around the edges, a widening of yields, a loss of confidence in the finance minister and then boom: Leaks about Italy being too big to bail.