Asia Unhedged observed earlier today that the turnaround in global stock markets at around 10:30 EST started in Italy and spread everywhere else. The euphoria over the EUR 17 billion bailout of two Veneto banks morphed into worries about the impact on Italy’s budget. The senior debt of the two rescued banks jumped by 15 points.

The trouble is that the bill will come back to the Italian taxpayer, already burdened by EUR 2.2 trillion in public debt, or about 125% of GDP. That’s the same debt outstanding as Germany with an economy roughly half the size. Italian stocks plunged, we observe, right after Italian bond futures plunged, as the circled area on the accompanying chart makes clear.

The Italian government is supposed to bail out the banks that have been bailing out the government (the banks own about 22% of all Italian government debt outstanding). They can’t both bail each other out, which makes Italy a continuing source of risk.