Just over a year ago, Greece was in severe financial crisis. Then came Ireland, followed a bit later by Portugal. Throughout the first year of the single-currency crisis the rule of thumb was that only the states on the edges of Europe were in dire trouble. But over the past few days, what markets treat as the risky periphery has got a whole lot bigger.
Financiers are now treating Spain's government debt with fresh wariness, pushing up the interest rate on 10-year IOUs to over 6%. That is over double the rate at which markets are willing to loan to Germany, and implies that Spain is still being treated as a much bigger credit risk than its northern European neighbours. Even more worrying, the eurozone's third-largest economy, Italy, is also coming under increased suspicion – interest on its 10-year bonds is almost 6%. In theory, as members of the same single currency, with the same central bank setting a single benchmark interest rate, each country should be able to borrow at near enough the same rates. Instead, what's happened over the past couple of years is that markets have divided the eurozone between the wheat (Germany, Austria, the Netherlands and a few others) and the chaff – which is an ever-expanding category. Spain and Italy now risk being marked chaff, and being charged consistently punitive rates for loans from the money markets.
If that happened, the eurozone really would be under existential threat. The cash Europe would need to scrape together to lend to Spain and/or Italy would exhaust existing funds. The next few months offer plenty of opportunity to test Rome's creditworthiness: it has €335bn of loans maturing over the next year, a sum much larger than all its troubled neighbours put together, and will need to borrow hundreds of billions. And each time it goes to the market for a loan, investors around the world are likely to worry about the results.
There is little to link Italy with Spain or Greece or Portugal. Spain had a massive property bubble that brought its banks to collapse but a relatively strict fiscal regime; Greece had huge budget overdrafts that it tried to hide; and Italy has simply racked up a huge amount of debt since the second world war. The main connection is that anxious creditors now see them as risky bets; and the single biggest cause of market anxiety at the moment is the inability of the European policymaking elite to resolve the Greek crisis. Should Athens default on its loans or not – and on what terms? It has taken policymakers over a year even to agree that this is the question on which Greece's fate hinges; and there is still no sign of an answer.