Mighty Cyprus (or, at least, the southern ’Greek’ half of the divided island) is another inmate in the Eurozone’s prison house of nations and it’s coming into focus. That’s not a good thing. Moody’s has just downgraded its debt, and, the Daily Telegraph’s Ambrose Evans-Pritchard reports that Cypriot credit default swaps have jumped (although these will be extremely illiquid, so pricing has to be treated with care) into the danger zone. Cyprus’s politics are tricky, its main power station is down and, relative to the country’s size, its banking sector is huge (with a good chunk of the deposits coming from Russia) but burdened with heavy exposure to Greek government debt). As is the case elsewhere in the single currency’s periphery, competitiveness has been badly hit by membership of the one-size-fits-none euro. As Evans-Pritchard points out, Cyprus is small enough to be manageable, but::

Should a 4th eurozone country emerge from out of the blue and ask for a bail-out, it will test the patience of Slovakia, Finland, the Netherlands and Germany yet nearer to breaking point. Exactly where that breaking point lies is the great unknown.

Indeed it is. Meanwhile, the warning signs from Italy won’t go away. Bloomberg reports:

Italy sold 2.7 billion euros of its 10-year benchmark bond, less than the maximum target of 3 billion euros. The debt was priced to yield 5.77 percent, which compares with 4.94 percent the last time the securities were sold on June 28…Italian bonds fell for a second day after the sale, increasing the yield spread over German bunds. Italian 10-year bond yields rose 17 basis points to 5.94 percent as of 12:41 p.m. in London. The 4.75 percent security due September 2021 fell 1.22, or 12.20 euros per 1,000-euro face amount, to 91.71. That pushed the difference in yield, or spread, to 10-year German bonds 21 basis points wider to 332, the most since July 18.

The danger of contagion is clearly out there. And yes, fears over the US debt ceiling debate only add to the jitters.