Markets and the euro 'end game'
Two very worrying things have happened in the eurozone in the past two weeks.
The first is that financial markets have started to take seriously the idea that the single currency will break up. The second is that the politicians with the most to lose from that happening have dug in their heels.
Needless to say, the two things are related. Investors look at the political gridlock and they draw their own conclusions.
Today's meeting of the French, German and Italian leaders is one effort to change the dynamic, but investors are not holding their breath. This morning, we have seen the interest rate on German 10-year bonds actually edge above the yield on similar UK bonds.
In my conversations with analysts, traders and officials, I'm finding more and more of them are talking about the end game for the euro. Not the end, necessarily, but a moment of truth very soon that will either force a big leap forward, or a wrenching break-up.
I should say that some of these people have been fatalistic from the start, but others only a few months ago were telling me the worst would never happen. Now they have a real fear that financial markets will simply decide to stop buying eurozone sovereign bonds until the situation is resolved.
Arguably, Italy is also approaching this kind of lender strike, in which rising yields make mainstream investors less and less likely to lend.
We all know, by now, that the interest rate on Italy's ten year bonds has risen to 7% in recent weeks, up from 5% in early September. You may not know that the two-year-rate is now almost as high, and the six month cost of borrowing has risen to 5.7%.
That only makes sense if people are expecting something very bad to happen very soon. Italy can live with 7% rates for some time, but it cannot last long if investors do not want to lend at almost any price. These prices begin to suggest the latter.
And Germany? Everyone has their own interpretation of Germany's "disastrous" sovereign debt auction yesterday, which was scheduled to sell 6bn euros ($8bn; £5.2bn) of 10-year German government bonds and instead sold only 3.6bn euros. The rest were retained by the German central bank.
Some say it is partly a reflection of Germany's idiosyncratic approach to its bond auctions. It tends to approach the market more as a price-maker than a price-taker, which can open itself up to disappointments if it gets the pricing wrong. There was also low take-up in several auctions in 2010.
A more exciting explanation, suggested by the folks at FT Alphaville, is that the Bundesbank actually wanted to walk away with all those bunds to make sure it could continue to control the very short term cost of borrowing in German money markets (that's the super-simplified version, anyway).
But nearly everybody thinks the auction does not bode well.
As I said on Friday, even Germany cannot be a safe haven if this crisis goes critical.
German bond yields have also risen slightly in recent weeks. That is a reflection of the fact that this crisis is now systemic, which means taxpayers in the country at the centre of the system are likely to lose out, pretty much regardless of how things turn out.
Think about it: Germany would suffer enormously if the euro broke up, but Germany would also pay a price if the eurozone were kept together only under duress, after months of deepening market turmoil and, probably, further bailouts.
An economic solution to the crisis that helps the periphery grow will require higher inflation in the core, ie Germany. A solution that doesn't help those countries grow will hammer German exports and require continued fiscal transfers from the centre.
We have seen in the past few months that the bond markets can be patient, up to a point. When world leaders gave Europe "six weeks to save the euro" back in late September, the financial markets broadly did the same.
Government borrowing costs for Spain and Italy crept up in the lead-up to the EU and G20 Summits, but by and large investors gave the politicians the benefit of the doubt.
Then, however, Europe's leaders failed to agree a detailed plan at those meetings. Since then the key players, notably Germany, have shown little or no desire to fill in the gaps.
Do you know anything more about the vague plans to leverage the EFSF than you did a few weeks ago? No? Me neither. Apparently, ECB President Mario Draghi hasn't heard any more about it either, and to judge by his recent remarks he's not best pleased.
Supposedly, France and Germany are coming up with a plan, and the EU leaders meeting on 9 December will provide more clarity.
But even the European officials who point to this date do so tentatively and wearily. There is a complete lack of momentum.
All of which seems rather curious for anyone close to European financial markets these days. For them, the momentum is very clear, and it is in a bad direction.