THE sense of crisis in the euro area is building. Toby Nangle of Baring Asset Management pointed out that the 60 basis point widening in spreads between Italian and German bonds yesterday was a phenomenal move for the world's third largest bond market. After a very shaky start today, some stability has appeared on talk that the European Central Bank (or the bank of Italy acting as its proxy) has been in the market to buy Italian bonds.
But this is exactly where the European authorities didn't want to be. The rescues of Greece, Ireland and Portugal were all designed to buy time and prevent contagion spreading to Italy and Spain. That strategy has clearly failed.
As Italy has faltered, so the risk-off trade has taken hold. At noon today, the Stoxx 50 index was off 1.7%; the euro had dropped to below $1.40; oil was down 1.6%. There is a sense that the markets are moving faster than the authorities can keep up; one can find parallels with the ERM crisis of 1992, the first wave of the credit crunch in 2007 or the post-Lehman shockwaves of autumn 2008. Things may get worse after Friday, when the stress data on European banks is released and the market can identify the weakest zebras in the pack.