The best way to understand what is going on is through the following simplified sequence: banks-sovereigns-policies.

Specifically:

· Banks stocks led the debacle on European bourses Monday, with drops of some 5-12 percent in a single day.

· With so many European banks holding so much European government debt on their balance sheets, the dramatic sell-off in their shares reflects mounting pressures in the sovereign bond markets.

· Several records have been set today, from a 92 percent annualized yield on very short-dated (6-month) Greek bonds to the risk spreads on Italian and Spanish CDS (credit default swaps).

· But an important element of the story is elsewhere. It has to do with the ECB's ability to influence the yield on the Italian ten-year bond.

· For a while, outright ECB purchases of Italian bonds on the secondary market had succeeded in keeping that yield at or below the 5 percent level for the "old" Italian ten-year benchmark bond. In recent days, however, the yield has migrated upwards and today it touched some 5.5 percent.

The jury is still out as to whether the ECB "allowed" the yield to rise, as a way of putting pressure on the Italian authorities (and other European fiscal agencies) to get their act together, or whether the ECB itself is getting "overwhelmed" by market dynamics. But either way, European markets are troubled.

The perspective in Europe is that the ECB is showing less willingness/effectiveness (you pick, one or both of these interpretations) in delivering on a signaled policy objective. It also does not help—in fact, it hurts, and does so materially—that too many European policymakers and politicians are out there with so many confusing and, in some cases, conflicting remarks.

Once again, already fragile U.S. markets will be influenced by developments on the other side of the Atlantic—and in a week in which there is great anticipation for President Obama's "mission critical" speech on the American economy.

Europe's deepening debt and growth crisis amplifies the importance of President Obama's effort to deal with America's deepening unemployment and growth crisis; and does so by raising both the stakes and the challenges for the President.

Tighten those seat belts. It will be a bumpy and volatile week as markets are held hostage to policy developments in both America and Europe.

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Mohamed El-Erian is chief executive officer and co-chief investment officer of Pacific Investment Management Co.