Yesterday's bond auctions might have gone well enough, but unfortunately other issues are brewing in Europe and moreover they are getting progressively worse. In Italy, as the economy reverses more rapidly than expected, the fiscal dynamics look increasingly problematic. Unsurprisingly, the IT/GER 10yr spread widened another 15bp to almost 400bp. Spain is in the doghouse as well, for similar reasons, with the 10yr yield not far short of 6.0% again. Also worth noting is the continued underperformance in France – the 10yr FR/GER yield spread was 15bp wider at 140bp at one point, compared with 100bp just a month back. Part of the explanation lies in the increasing likelihood that François Hollande will become France's next President. Hollande has been threatening to renegotiate the fiscal compact if elected (little wonder Merkel wanted to campaign for Sarkozy), and he has vowed to raise the minimum wage; he also wants the ECB to be more active in resolving Europe's sovereign debt crisis. Not to be outdone, New Democracy Party leader Samaras has pledged to push back implementation of the Greek bank recapitalisation plan until at least after the election. Just as well some of Europe's finance ministers are gathered together in Washington – they might as well start discussing how to deal with Europe's next financial tsunami. As the IMF's latest Global Financial Stability Report made clear, European faces a huge credit crunch over the next 18 months as banks shed USD 2.6trln of assets. Strap yourself in, there is worse to come!