…another type of contagion is causing concern: the risk of problems spreading to big banks, especially in Italy and Spain.

The growing vulnerability of the giant banks in these two countries is spurring investor fears that Europe’s latest bid to get a handle on its festering debt crisis, adopted just a few weeks ago, has come up short.

The banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls, amid concerns that the cost of government borrowing could become too expensive for Italy and Spain to bear.

Now there are signs that these concerns are, in turn, making it harder and costlier for the banks to borrow money to finance their day-to-day operations, a troubling trend that, at the worst, could lead to liquidity problems.

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Investors continued to flee Italian and Spanish bonds Tuesday amid renewed concerns about the ability of Rome and Madrid to regain control of their finances in the face of sluggish growth and weakened administrations.

The Italian economy minister, Giulio Tremonti, called a meeting of the country’s financial authorities Tuesday to discuss the recent market turmoil, Reuters reported, citing an unidentified official. The Italian Treasury did not respond to calls seeking comment.

In Madrid, meanwhile, Prime Minister José Luis Rodríguez Zapatero delayed the start of a planned vacation to the southern region of Andalucia. Reuters quoted the secretary of state for communications as saying the prime minister wanted to “more closely monitor the evolution of the economic indicators.”

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Behind the paralysis in Washington and prevarication in Berlin lies a troubling thought. Political systems in thrall to 24-hour rolling news have lost the capacity to make difficult choices. Globalisation imposes wrenching change and simultaneously saps the ability of governments to adapt. Politicians find it easier to argue about taxing the rich or cutting Medicare and about central bank bond purchases versus default than to confront the consequences for western societies of the profound upheaval in the global economy.

So it is tempting to say all is lost ”“ that a political and economic model built on western primacy is cracking under the strain of the shifting balance of international advantage. The American dream and European welfare state are bending to the competitive winds of globalisation.

Tempting but premature. It is too early to despair. What makes the crises in Washington and Europe so infuriating is the fact that, for all they demand hard decisions, they are susceptible to political solution. The missing ingredient is leadership.

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On June 28, Pope Benedict XVI named the 69-year-old Patriarch of Venice, Cardinal Angelo Scola, as the new Archbishop of Milan.

At one level, it’s tempting to read this as a lateral move. Venice actually produced three popes in the 20th century (Pius X, John XXIII, and John Paul I) to Milan’s two (Pius XI and Paul VI), so it’s not like Scola’s transfer to the See of Ambrose lifts him out of obscurity. Among insiders, he was already considered an ecclesial heavyweight and top-tier future prospect….

…Milan isn’t just a job — it’s a unique vote of papal confidence, and a platform for global leadership. Church-watchers usually assume that when a pope sends someone to Milan, he’s pointing him out as a possible successor. Benedict XVI is no naïf; he’s aware of that calculus, which means that at a minimum, he has enough confidence in Scola to put him in a place where the papacy is a live possibility.

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Five years ago, I was among those who argued that the probability of a collapse of the eurozone was close to zero. Last year, I wrote it was no longer trivial, but small. The odds have risen steadily since, not because of the crisis itself, but the political response. I now would put the odds of a break-up of the eurozone at 50:50. This is not because I doubt the pledge by the European Council to do whatever it takes to save the euro but because I fear it has left things too late. The council may be willing but it will not be able to deliver. As I argued last week, a eurozone bond is the only solution to the crisis. But this gets progressively more expensive, and politically less realistic, once bond spreads of large countries widen.

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This week the shortcomings of this muddling-through were laid bare… Financial markets turned on Italy, the euro zone’s third-biggest economy, with alarming speed. Yields on ten-year Italian bonds jumped by almost a percentage point in two trading days: on July 12th they breached 6%, their highest since the euro was created. The Milan stockmarket slumped to its lowest in two years. Though bond yields subsequently fell back, the debt crisis has clearly entered a new phase. No longer confined to the small peripheral economies of Greece, Ireland and Portugal, it has hurdled over Spain, supposedly next in line, and reached one of the euro zone’s giants. All its members, but especially Germany, face a stark choice.

Consider the stakes. Italy has the biggest sovereign-debt market in Europe and the third-biggest in the world. It has €1.9 trillion ($2.6 trillion) of sovereign debt outstanding, 120% of its GDP, three times as much as Greece, Ireland and Portugal combined””and far more than the €250 billion or so left in the European Financial Stability Facility (EFSF), the currency club’s rescue kitty. Default would have calamitous consequences for the euro and the world economy. Even if the more likely immediate prospect is sustained stress in the Italian bond market, that will surely prompt investors to flee European assets, making the continent’s recovery ever harder. Meanwhile in the background there is the absurd pantomime of Barack Obama and congressional Republicans feuding over how to raise the federal government’s debt ceiling to stave off an American “default”…. That may have distracted American investors briefly; once they realise how much is at stake in Italy, it will not help.

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The European debt crisis has entered “uncharted territory,” rekindling concern it will spread eastward through banking and trade links, according to the European Bank for Reconstruction and Development.

Italy’s Unicredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), two of eastern Europe’s biggest lenders, fell to the lowest in more than two years July 11 as political infighting threatened to delay efforts to cut the budget deficit in the country with Europe’s largest debt burden. European leaders this week failed to agree on a new aid package for Greece.

“We are in uncharted territory,” Erik Berglof, chief economist at the London-based EBRD, which invests in eastern Europe and Central Asia, said in a July 12 interview. “The source of the contagion seems to be in worse shape.”

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…everyone knows that Italy is on the slow train to ruin. Her public finances have been reasonably well run, but the economic fundamentals are skewed against her. Her poor demographic mean fewer workers ”“ and thus taxpayers and savers ”“ to fund the health and social costs of a greying populous. And, like Portugal and Greece, she is fundamentally uncompetitive, unable to match German levels of productivity and exports.

Il miracolo economico of the 1960s ”“ symbolised by millions of little Fiat 500s pouring out of bustling Turin ”“ was possible because a vast reservoir of underemployed agricultural workers could be lured into the cities. That cannot be repeated.

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European Council President Herman Van Rompuy has called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday morning, reflecting concern that the crisis could spread to Italy, the region’s third largest economy.

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.

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Investors are withdrawing cash from money market funds heavily exposed to short-term debt issued by European banks out of fear that a Greek default could spark contagion across the region’s financial sector.

At the same time there is increasing reluctance among US banks to lend to their European counterparts in the past two weeks because of growing worries over Greece, according to brokers and bank traders.

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Check it out.

The Vatican is betting an iPod beats “Shush!” in lowering the tour guide noise level in basilicas.

It will even lend you one for free to try to prove its point.

From a tiny booth in the back of St. John in Lateran, the Holy See’s pilgrim agency has been quietly asking tourists if they want to tour Rome’s oldest basilica with an iPod in hand loaded with an app specially designed to access the place’s art, architecture and Christian history.

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“Faith is not conserved by its own merits in the world, it is not automatically transmitted to the human heart, but must always be announced. To be effective the proclamation of faith must begin with a heart that believes, hopes, loves, a heart that loves Christ and believes in the power of the Holy Spirit!”

This was Pope Benedict XVI’s message to the bishops, clergy religious and laity of his diocese Monday evening, gathered together in the basilica of St John Lateran to open the annual convention of the Diocese of Rome.

The Holy Father called priests, parents and catechists to launch a new evangelisation, to transmit a living faith to the future generation of Romans and create a community of believers in the eternal city where the Gospel is not only preached but put into practice.

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Yet Dante was the greatest poet of the Middle Ages. It could be argued that he was the greatest of all European poets, of any time or place. But while most non-Italian readers are prepared to take this on trust, they sidestep his work, making him one of the great unreads. In so doing, they leave unsavoured one of the greatest aesthetic, imaginative, emotional and intellectual experiences on offer.

They are like those who have never attended a performance of Mozart’s Don Giovanni, or of Shakespeare’s Lear; who have never heard a symphony by Beethoven or visited Paris. Quite simply, they are missing out.

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Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said probably the most worrying development for the euro was the surge in Italian government bond yields in response to S&P’s move.

He said: “Italy has the largest government bond market in the eurozone and continued rising yields there over the coming weeks would have a very destabilising impact on the eurozone debt markets.

“With the authorities still seemingly divided over how to proceed with the debt crisis there remains considerable short-term risks for the euro.”

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Pope Benedict XVI elevated 24 new cardinals in a festive ceremony in St. Peter’s Basilica on Saturday, bestowing quadrangular red hats on the new members of a group that will one day elect his successor.

Two Americans were among the newly elected. Archbishop Donald W. Wuerl of Washington, D.C., is seen as a bridge-builder and was greeted with waves of applause from the hundreds of supporters who came for Saturday’s ceremony. Archbishop Raymond L. Burke, a former archbishop of St. Louis, is now the prefect of the Apostolic Signatura, a Vatican court, and is known for his outspoken criticism of President Obama and of Catholics who are abortion rights supporters.

Dressed in heavy golden vestments, Benedict called on the new cardinals to devote themselves entirely to humble service to the church, whose force, he said, is “not the logic of supremacy, of power according to human criteria, but the logic of bowing down to wash feet, the logic of service, the logic of the cross which is at the base of every exercise of power.”

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There will be sovereign defaults in the eurozone, with a default by Greece now inevitable. Ultimately the thing that underpins any country’s debts is its ability to raise enough tax to service and eventually repay them. Greece cannot hope to do that. Ireland will be pushed to do so but probably can. I would, however, worry about the long-term credit-worthiness of Portugal, Spain and Italy.

So then you have to ask whether a default of a eurozone state breaks up the eurozone. I don’t think we know the answer to that yet. We do know that the Germans, who hold the cards, will do absolutely everything they can to stop such a default, even if they have to grit their teeth as they do so. My instinct is that a country defaulting would not of itself lead to that country leaving the euro, but if its costs and prices were totally out of line, that probably would be the least painful way of extracting itself. If that is right in the short-term, things will be patched up and the euro will come through this downturn intact. But the next downturn, in five or 10 years’ time? Surely not.

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American pundits and politicians continue to argue over whether building an Islamic cultural center two blocks from ground zero ”“ where Al Qaeda destroyed the World Trade Center nine years ago ”“ is appropriate.

But as the debate, centered around religious freedom and the role Islam itself played in the 9/11 attacks, continues in New York another of the world’s great cultural cities is arguing over a proposal for its first mosque. And proponents are getting help from an unlikely corner: the Vatican.

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Italian police have seized seven tons of the powerful RDX explosive which they found in a shipping container they believe were likely destined for a terrorist organization.

While the origin and destination of the contraband is still being investigated, police are convinced the huge amount of explosive was in transit, possibly from Iran to Syria.

“The truly astonishing amount (of explosive) we seized leads us to believe the recipients could be large international criminal organizations, perhaps tied to terrorism,” Carmelo Casabona, the chief of police said at a press conference in Reggio Calabria today, according to the ANSA news agency.

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Libyan leader Col. Moammar Gadhafi, who holds increasing sway in the Italian economy, upset some Italians by urging conversion to Islam during a three-day visit to the predominantly Roman Catholic country.

Col. Gadhafi held a series of private meetings on Sunday and Monday with some 800 Italian women and a small group of young men organized by a hostess agency and paid for by the Libyan government.

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Tradition holds that St. Peter was jailed in Rome’s maximum security Mamertine Prison before he was crucified upside down and buried on the hill where St. Peter’s Basilica was later built.

And now after recent excavations in Rome’s oldest prison, archaeologists say they have uncovered evidence that, while not providing direct proof, does support that belief.

The prison, which lies beneath the Church of St. Joseph of the Carpenters facing the Roman Forum, was closed for the past year as experts dug up old floors and picked away plaster.

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The Galileo case is often seen starkly as science’s first decisive blow against not only faith but also the power of the Roman Catholic Church. It has never been quite that simple, though. Galileo was a believer, devastated at being convicted, in 1633, of heresy for upending the biblical view of the universe.

Now a particularly enduring Catholic practice is on prominent display in, of all places, Florence’s history of science museum, recently renovated and renamed to honor Galileo: Modern-day supporters of the famous heretic are exhibiting newly recovered bits of his body ”” three fingers and a gnarly molar sliced from his corpse nearly a century after he died ”” as if they were the relics of an actual saint.

“He’s a secular saint, and relics are an important symbol of his fight for freedom of thought,” said Paolo Galluzzi, the director of the Galileo Museum, which put the tooth, thumb and index finger on view last month, uniting them with another of the scientist’s digits already in its collection.

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World Cup winning…[Italian coach Marcello] Lippi made no excuses.

“I take all responsibility, there are no excuses because when a team comes to a match as important as tonight’s with terror in their legs, their heads and their hearts, and don’t manage to express themselves, it means that the coach hasn’t prepared them in the right way,” an ashen-faced Lippi told a news conference without even being prompted by a question.

“I didn’t think we could win the World Cup but I thought we would do better.”

In a strikingly honest assessment of what went wrong, Lippi pummelled himself verbally for 15 minutes.

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Defending champion Italy was held to a second 1-1 draw, this time by lowly New Zealand in the latest World Cup stunner.

The 78th-ranked All Whites took the lead after only seven minutes of Sunday’s Group F match when Italy’s 36-year-old captain Fabio Cannavaro made a horrendous error, handing a goal to Shane Smeltz. A long free kick from Simon Elliott sailed deep into Italy’s area, off Cannavaro’s hip as he fell and directly toward the waiting Smeltz for the tap-in.

It was New Zealand’s only shot on goal the entire match.

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A married teacher is poised to become Italy’s first woman priest when she is ordained later this month in an Anglican church close to the Vatican.

Maria Longhitano, a member of the breakaway Old Catholic Church, says she hopes her ordination will break down “prejudice” in the Roman Church.

The event may energise the debate among Roman Catholics about the role of women, a BBC correspondent says.

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The head of the Austrian Church has launched an attack of one of the most senior cardinals in the Vatican, saying that Cardinal Angelo Sodano, dean of the College of Cardinals, “deeply wronged” the victims of sexual abuse by Catholic clergy when he dismissed media reports of the scandal. In a meeting with editors of the main Austrian daily newspapers last week, Cardinal Christoph Schönborn, the Archbishop of Vienna, also said the Roman Curia was “urgently in need of reform”, and that lasting gay relationships deserved respect. He reiterated his view that the Church needs to reconsider its position on re-married divorcees.

On Easter Day, Cardinal Sodano called the mounting reports of clerical sex abuse “petty gossip”. This had “deeply wronged the victims”, Cardinal Schönborn said, and he recalled that it was Cardinal Sodano who had prevented Joseph Ratzinger, then a cardinal, from investigating allegations of abuse made against Cardinal Hans Hermann Groer, the previous Archbishop of Vienna, who resigned in disgrace in 1995.

Cardinal Schönborn said that Pope Benedict was “gently” working on reforming the Curia but he had the whole world on his desk, as the cardinal put it, and his way of working and his style of communication did not make it easy to advise him quickly from outside.

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Yesterday night’s important news out of Europe points to renewed efforts to rescue Greece and safeguard the Euro. The news will undoubtedly be accompanied by additional announcements out of Brussels and Berlin, as well as Washington DC. In the process, the stakes are getting even bigger”¦for Greece, Europe and the global economy.

As the announcements multiply, it is even more important to be clear about the key question. This is best summarized by a simple, and disturbing image, that a friend alerted me to:

With Greece (as well as Portugal and some other countries) now visibly drowning in a sea of debt, the question is whether the rescuer (EU/IMF) can pull off the rescue or, instead, get pulled down with all parties drowning.

So far, the attempts at rescue-including last Sunday’s dramatic EUR 110 billion announcement-have have been incomplete with respect to both design and implementation. They were thus viewed as insufficient and not credible by analysts and markets. As a result, the Greek crisis morphed in the following days into something much more sinister for Europe and the global economy.

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European Union officials were working out the details of a financial support mechanism on Saturday to prevent Greece’s debt turmoil spreading to Portugal and Spain, ready for approval by EU finance ministers on Sunday.

The leaders of the 16 countries that use the single currency said on Friday after talks with the European Central Bank and the executive European Commission that they would take whatever steps were needed to protect the stability of the euro area.

Both Italian Prime Minister Silvio Berlusconi and French President Nicolas Sarkozy cancelled trips to Moscow to mark the anniversary of the end of world war two in order to continue consultations over the crisis, though German Chancellor Angela Merkel said she would still go.

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It is harder than ever for young people to learn the faith, because the culture keeps them from maturing and developing their freedom, according to the Italian bishops.

This was one observation made by the prelates in their four-day permanent council meeting last week. Cardinal Angelo Bagnasco, archbishop of Genoa and president of the episcopal conference, led the meeting.

Given the difficulties in transmitting the faith, the bishops emphasized “the need for greater attention in presenting Catholic doctrine so as not to reduce Christian initiation to a generic experience,” according to Monsignor Domenico Pompili, conference spokesman. He said there is a growing awareness that the entire community needs to be catechized, and this conviction needs to continue to become stronger.

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Following weeks of media coverage of sex abuse by priests in the United States, Ireland and Germany, three deaf men from Italy appeared on national TV last week.

Gianni Bisoli, 61, entered a Catholic institute for the deaf in Verona at age 9. He described how he was subjected to three years of sexual abuse. And he listed the abusers’ first names ”” many of whom are still serving as priests.

Bisoli described how he was often taken to the home of the local bishop, who used him as a sexual toy. The network bleeped out the bishop’s last name. A total of 67 former students of the same institute for the deaf had signed similar affidavits last year.

Their story was briefly in the news but was quickly swept under the rug.

Robert Mickens, Vatican correspondent for the British Catholic weekly The Tablet, says that was possible thanks to a long entrenched code of silence.

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