I suggested last week, in what seemed like a counter-intuitive phenomenon to some, that sharply lower prices for Greek bonds would bring out sellers rather than buyers. Such sellers, and there are potentially too many of them, would be reacting late to the recognition that “safe” instruments that they bought for their “interest rate bucket” have turned out to be something else – namely, volatile credit exposure that is subjecting them to both financial loss and reputational damage.

No wonder late-moving sellers have been looking over the past few days to reduce their holdings of Greek bonds. This has accentuated market volatility and illiquidity. Combined with this week's downgrades in the credit ratings of peripheral European countries, the result has been a dramatic sell-off in European equities, a further disorderly widening in sovereign risk spreads and pressure on the euro.

The Greek debt crisis is now morphing into something much broader. No wonder the European Union and the International Monetary Fund are scrambling to regain control of the rapidly deteriorating situation. There is talk of a bigger bail-out package for Greece. The heads of the European Central Bank and IMF have made the trip to Germany that is reminiscent of the Ben Bernanke-Hank Paulson trip to Congress in the midst of the US financial crisis.