Credibility takes days to wreck and months to restore.

Markets are in a great mood after Italy’s Senate passed the austerity budget and it’s expected to pass the lower house tomorrow. This is a good first step but it will take a tremendous effort to regain the market’s confidence.

European Council President Van Rompuy just wrapped up a speech in Florence saying Italy will have “real work to do” after Parliament approves the latest steps. Number one is the implementation, which he called “absolutely critical” suggesting to me that there’s a risk there.

Italian yields have fallen to 6.57% but they will need to drop below 6%, at least, to take them down from crisis levels. At the same time, any negative headline risks another blowup with EUR hanging in the balance.

If the weekend goes as planned and Berlusconi steps down the next test will be a 5-eyar note auction on Monday. The size has been scaled down to 1.5B-3.0B from the planned 6B so the bar has been considerably lowered.