We're raising our alert status for the next financial crisis. We already raised it last week after spreads on US credit default swaps started blowing out. We raised it again after seeing the remarks of Mr Mobius, chief of the $50 billion emerging markets desk at Templeton Asset Management. Speaking in Tokyo, he pointed to derivatives, the financial hairball of futures, options, and swaps in which nearly all the world's major banks are tangled up.

And what of the derivatives sitting on the balance sheet of the Federal Reserve? Here's another factor behind our heightened state of alert. Through quantitative easing efforts alone," says Euro Pacific Capital's Michael Pento, "Ben Bernanke has added $1.8 trillion of longer-term GSE debt and mortgage-backed securities (MBS)."

Think about that for a moment. The Fed's entire balance sheet totaled around $800 billion before the 2008 crash, nearly all of it Treasuries. Now the Fed holds more than double that amount in mortgage derivatives alone, junk that the banks needed to clear off their own balance sheets.

"As the size of the Fed's balance sheet ballooned," continues Mr Pento, "the dollar amount of capital held at the Fed has remained fairly constant. Today, the Fed has $52.5 billion of capital backing a $2.7 trillion balance sheet.

"Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30-to-1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51-to-1! If the value of their portfolio were to fall by just 2%, the Fed itself would be wiped out."

They may not carry the same drama as "bond market mayhem", but the very idea of altering the fundamental laws underpinning the European Union so soon after they were agreed runs the risk of shaking the 50-year-old European project to its core and may end up exacerbating the sovereign debt crisis. German Chancellor Angela Merkel has been the most forthright of Europe's leaders in calling for changes to the Lisbon Treaty, arguing that amendments are necessary if there is to be more rapid integration and greater stability in the euro zone. The changes she is seeking include much stricter sanctions on countries that miss budget deficit targets.

"It is time for a breakthrough to a new Europe," she said in Berlin last week, emphasizing that the survival of the EU depended on being able to amend its treaty, even though it took eight years to negotiate and came into force only two years ago. "A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive. I'm convinced of this."

"Any revision of the treaty is for deeper integration of the euro area but also for a stronger European Union," Commission President Jose Manuel Barroso told the European Parliament on Wednesday, a bid to keep the process inclusive of all 27 countries in the EU, not just the 17 in the euro zone. "But let's not fool ourselves. Treaty change takes time and should not be seen as the immediate solution for the current crisis," he said. Others are even more cautious, including Herman Van Rompuy, the president of the European Council and the man responsible for chairing summits of EU heads of state or government.

Van Rompuy's concern is that opening the treaty to changes without a very precise idea of why and to what extent runs the risk of everything in the document suddenly being up for renegotiation - not unlike pulling a single thread in a knitted sweater only to see the entire piece of clothing unravel. In discussions he will have with leaders over the coming month, Van Rompuy will try to define what changes might be needed and only then look at what the legal necessities are.

The emergency administration, which is meant to govern Italy until elections are due in 2013, is made up of bankers, lawyers and university professors but not a single elected official - an extraordinary development for a Western democracy.

But it is a deal that much of the electorate and nearly all the mainstream parties have signed up to, in order to save Italy from the economic abyss by trimming the country's bloated bureaucracy, slashing its 1.9 trillion euro debt and unleashing its economic potential after years of stagnation.

Almost none of the new appointees was familiar to the average man or woman in the street - a fact that some Italians hailed as the new administration's chief strength, saying it was above party politics and untainted by any links to the discredited centre-Right government of Silvio Berlusconi or the weak and divided centre-Left opposition. Italy has a track record of appointing 'technical' governments during periods of political paralysis and party deadlock.

Mr Monti said that after talks with the country's big parties, he had decided that "the non-presence of politicians in the government would help it."

For EU veterans, the drama has echoes of 1993 when the Bundesbank ditched orthodoxy to rescue France, after first cutting Britain and Italy adrift in the Exchange Rate Mechanism. But this time the stakes are much higher. On that occasion, Chancellor Helmut Kohl pulled rank, more of less ordering his bankers to obey. "We must always bow three times before the Tricoleur", as he famously put it.

On Wednesday, France began to deploy its political leverage in earnest, leading an open revolt against Germany over the fire-fighting role of the European Central Bank. The country's budget minister Valerie Pecresse said the central bank had a greater duty to Europe's citizens than mere adherence to its low inflation mandate. "The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures," she said. Finance minister François Baroin made near identical comments to Les Echos.

In what is clearly a co-ordinated move by top EU players, European Commission chief Jose Manuel Barroso said Europe is "facing a truly systemic crisis" that requires a condign response from all players in the unfolding drama. "Should the central bank be responsible for financial stability as well as price stability? My reply is yes, definitely." It is a painful moment for Germany. Either it gives up fiscal sovereignty and monetary purism, embracing eurobonds and allowing the ECB to backstop Europe's sovereign debt; or it endangers its whole strategic investment in Europe's post-War order.

The EU's €440 billion EFSF bail-out fund was supposed to take over on the rescue task, relieving the central bank. It has been a disastrous flop, unable to raise money itself at a viable cost after toying with leverage plans that greatly concentrate risk for creditor states. The net effect has been to accelerate contagion to the core. This leaves the ECB as the only lender of last resort, the one body that can stop monetary union spiralling out of control. "It's ECB bail-out or bust. And it's looking like bust," said Nobel economist Paul Krugman.

The eurozone crisis has left UK banks unable to raise the funding they need to make loans to businesses, evoking the spectre of the crunch that followed the collapse of Lehman Brothers. And on one critical measure - the cost of insuring banks against going bust - lenders are already facing tougher conditions than at the height of the crunch, the Bank said.

Sir Mervyn King, the Bank's Governor, said that because of the eurozone crisis, households, companies and banks face a period of extraordinary uncertainty, including a possible slide back into recession. "There is weakness over the next few quarters. No one can know what precisely the outcome will be," he said. "In the last three years, we have seen extraordinary events. Who knows what's going to happen tomorrow, let alone next month?"

The banks can only issue loans to companies and home owners if they can find sufficient funding on the markets. According to the Bank of England's inflation report, banks' funding in the three months to September fell to levels not seen since Lehman Brothers, the US investment bank, crashed in September 2008.

At a meeting of the Arab League in Morocco, he said diplomatic efforts were "close to the end of the road". As diplomatic pressure increases on Damascus, the situation on the ground is deteriorating as well. More and more clashes are being reported between the regular army and opponents who now call themselves the Free Syrian Army.

That raises the spectre of this turning into a full-scale civil war.

But Syria has shown little sign of compromise. At today's meeting here in Morocco, Arab ministers are expected to confirm Syria's suspension from the Arab League and possibly impose new measures. Syria's chair at the meeting is empty after Damascus angrily decided to boycott the meeting. Attitudes are hardening on all sides.

The plan to post up to 2,500 Marines in the Northern Territory from mid-2012 was unveiled Wednesday during a lightning visit to Canberra by US President Barack Obama, who said it was a "commitment to the entire Asia Pacific region." But it drew criticism from China, widely seen as the target of the move, with the foreign ministry questioning whether it was appropriate or "in the interest of countries in this region."

Obama said the notion that the United States was afraid of or trying to edge out China was "mistaken" but stressed during his remarks on the Australian military boost that the Asian powerhouse would have to "play by the rules. I've said repeatedly and I'll say again today that we welcome a rising, peaceful China," he said in a joint press conference with Prime Minister Julia Gillard on Wednesday. "The main message that I have said not only publicly but privately to the Chinese is that with their rise comes increased responsibilities. It's important for them to play by the rules of the road."

"There's going to be times where they're not and we will send a clear message to them that they need to be on track in terms of accepting the rules and responsibilities that come with being a world power." The Australian troop boost is seen as a clear statement by Washington that it intends to stand up for its interests in the region. The US has viewed with concern China's growing assertiveness in the region on territorial disputes, as have many of the Asian powerhouse's neighbours.

That, in turn, is fuelling inflation and increasing the pain for hundreds of thousands of Hungarians who took out mortgages in foreign currencies when the forint was much stronger. Fitch and Standard & Poor's on Friday shifted their credit outlook for Hungary, rated on the lowest investment grade, to negative - making a downgrade to junk status appear only a matter of time.

With the highest government debt among central and east European countries, Hungary has seen credit flows slow as investors have fled risk and the growth outlook for its biggest market - the eurozone - has darkened. There are now fears that Hungary's predicament could foreshadow a new wave of contagion to CEE countries, which were particularly badly hit by the 2008 financial crisis.

Hungary's centre-right Fidesz government is nonplussed. It says it has worked hard to control the budget deficit, targeting 2.5 per cent of gross domestic product next year, and started reducing government debt from the 80 per cent of GDP inherited from the previous administration.

"We are not Greece," says Zoltan Kovacs, a government communications minister. "We suspect some speculative steps behind this. It is not justified at all." Laszlo Akar, vice-president of GKI, a Budapest economic research institute, agrees that the current pressure is "not justified by the budget stance".

The Treasury aims to sell between 3 billion euros ($4.1 billion) and 4 billion euros of a new 10-year benchmark bond that will take its 2011 borrowing to almost 90 percent of the targeted amount. France, whose yield premium over Germany hit a euro-era high on Tuesday on fears it may lose its top-grade AAA rating, is also due to sell 6-7 billion euros of debt.

The Spanish auction will be the last before a general election on Sunday which is widely expected to usher the centre-right People's Party (PP) into power. With the crisis spreading to the 17-country currency's core, PP leader Mariano Rajoy will have little time to assure investors he can take control of Spain's finances and stop it becoming the fourth member of the bloc to require a bailout.

A successful Spanish T-bill auction on Tuesday and the recent rise in Spanish debt yields means the paper is likely to attract demand but the cost will be high, with an average yield of around 6.5 percent expected by analysts. A 10-year yield of more than 7 percent is generally regarded as unsustainable for countries to finance their debts.

Over the past year, as the Federal Reserve massively increased its holdings of US Treasury securities and entities in China marginally decreased theirs, the Fed surpassed the Chinese as the top owner of publicly held US government debt. In its latest monthly report, the Federal Reserve said that as of September 28, it owned $1.665 trillion in US Treasury securities. That was more than double the $812 billion in US Treasury securities the Fed said it owned as of September 29, 2010.

Meanwhile, as of the end of this September, entities in mainland China owned $1.1483 trillion in US Treasury securities, according to data published today by the US Treasury Department. That was down slightly from the $1.1519 trillion in US Treasury securities the Chinese owned as of the end of September 2010, according to the same Treasury Department report.

Thus, at the end of September 2010, the Chinese owned about $339.9 billion more in US Treasury securities than the Fed owned at that time. By the end of September 2011, the Fed owned about $516.7 billion more in US Treasury securities than the Chinese owned.

"Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the US banking industry could worsen," the New York-based rating company said yesterday in a statement. Even as US banks have "manageable" exposure to stressed European markets, "further contagion poses a serious risk," Fitch said, without explaining what it meant by contagion. The "exposures" of US lenders to major European banks and the stressed nations of Greece, Ireland, Italy, Portugal and Spain, known as the GIIPS, are smaller than those to some of the continent's larger countries, Fitch said.

The six biggest US banks - JPMorgan Chase & Co (JPM), Bank of America Corp (BAC), Citigroup Inc (C), Wells Fargo & Co (WFC), Goldman Sachs Group Inc and Morgan Stanley (MS) - had $50 billion in risk tied to the GIIPS on September 30, Fitch said. So-called cross-border outstandings to France for all except Wells Fargo were $188 billion, including $114 billion to French banks. Risk to Britain and its banks was $225 billion and $51 billion, respectively.

Europe's debt crisis has toppled four elected governments, with the last two, in Greece and Italy, falling last week. Italian bond yields remained at about 7 percent - the threshold that led Greece, Portugal and Ireland to seek bailouts - and shares of French banks, including BNP Paribas (BNP) SA and Societe Generale (GLE) SA, dropped amid concern they'll need more capital.

"Everything that we have seen and heard suggests that we may have tens of thousands of people tomorrow protesting. The protesters are calling for a massive event aimed at disrupting major parts of the city," Deputy Mayor Howard Wolfson told reporters this afternoon. Wolfson and Deputy Mayor Cas Holloway said all city agencies are on notice and extra cops will be on hand for the massive demonstrations - which could disrupt the morning commute and be among the largest in city history.

Holloway conceded commutes may take longer than usual. Organizers said they were energized by Mayor Bloomberg's decision early to end the two-month-long camp-out at Zuccotti Park. "We will shut down Wall Street," a post on the movement's Facebook page said. "We will ring the People's Bell, and initiate a street carnival in which we rebuild and celebrate the neighborhoods that the Wall Street economy has destroyed." The march on Wall Street is slated to start at 7 am.

Other events scheduled for the day include "Occupy the Subways" in all five boroughs at 3 pm, a takeover of Foley Square at 5 pm and another march across the Brooklyn Bridge.

Environment chiefs last night warned that with mild dry weather set to continue for the next few weeks, the UK could be heading for a winter drought which could have disastrous consequences. Cambridgeshire, South Lincolnshire and Northamptonshire had half the normal rainfall during September and October.

As a result, Anglian Water has applied for a drought permit to drain water from the River Nene to top up reservoirs which are only half full. It has applied to the Environment Agency to drain an extra 17 million litres a day between December and April. Farmers are also irrigating at night to reduce the amount of water evaporating as November temperatures remain above the average for the time of year.

Ciaran Nelson, spokesman for Anglian Water, said: "It may seem strange as you usually think of having to save water when it is hot. "But in fact this is the time of year when we need to save water the most as the reservoirs should be filling up ready for next spring."

European shares and the bonds of weaker euro zone countries recovered initially on the move on the day Italian Prime Minister-designate Mario Monti was to name a national unity government to implement long delayed structural economic reforms. "They're heavily in on Italy and Spain, 2-10 years," one trader said of the central bank intervention. Yields on Italian government bonds fell just below the 7 percent danger level, widely seen as unaffordable in the long term.

But ECB policymakers continue to reject growing international calls to intervene decisively as Europe's lender of last resort, stressing it is up to governments to resolve the debt crisis through austerity measures and reforms. Shares and the euro have tumbled over the last week as bond market contagion spread to AAA-rated France, the euro zone's second economy and a mainstay of the currency bloc's rescue fund. The risk premium investors charge for holding French debt rather than benchmark German 10-year Bunds hit another euro lifetime high above 190 basis points on Tuesday.

President Barack Obama turned up the heat on Europe to act more boldly to extinguish the spreading bushfire. "Until we put in place a concrete plan and structure that sends a clear signal to the markets that Europe is standing behind the euro and will do what it takes, we are going to continue to see the kinds of market turmoil we saw," he said on a visit to Australia.

Many analysts believe the only way to stem the contagion for now is for the European Central Bank to buy large amounts of bonds - effectively the sort of quantitative easing undertaken by the US and British central banks. This has been anathema in Germany. But on Tuesday Peter Bofinger, a member of the group of economists that advises the German government, said the ECB should indeed become the euro zone's lender of last resort if the bloc's debt woes risked tearing apart the financial system.

"If politics can't do it, then the ECB must do all it can to bring interest rates down to more reasonable levels," Bofinger said at Euro Finance Week.

The agreement, formally unveiled by Obama during a joint news conference with Australian Prime Minister Julia Gillard, will allow up to 250 US Marines to be stationed in northern Australia beginning next year. Obama insisted that any notion that the United States fears China or wants to exclude the growing power from American economic alliances in the Asia-Pacific region is mistaken. But he said the United States will keep sending a clear message that China needs to accept the responsibilities that come with being a world power. "It's important for them to play by the rules of the road," Obama said.

The US and China's smaller Asian neighbors have grown increasingly concerned about China claiming dominion over vast areas of the Pacific that the US considers international waters, and reigniting old territorial disputes, including confrontations over the South China Sea. China's defense spending has increased threefold since the 1990s to about $160 billion last year, and its military has recently tested a new stealth jet fighter and launched its first aircraft carrier. Obama said the new deployment to Australia was important because it would help partners in Asia feel that "we have the presence that's necessary to maintain the security architecture in the region."

The agreement sets standard rules for commerce. Obama said that while the US is not intentionally excluding China from the agreement, joining the pact will require Beijing "to rethink some of its approaches to trade." The US has accused China of undervaluing its currency to make Chinese exports cheaper and US exports to China more expensive. China had a $273 billion trade surplus with the US last year and US lawmakers say the imbalance hurts American manufacturers while taking away American jobs.