From Fortune Magazine website – Thanks a lot, Europe:
You know it’s bad when even the banks don’t want your money. So how did this all happen? The farcical debate on the debt ceiling temporarily distracted traders from the slow-motion sovereign debt crisis in Europe. There are stark differences between the debt dilemmas in the U.S. and Europe. In general, the current U.S. debt crisis is largely a self imposed one. Investors still want to buy U.S. debt. Conversely, in Europe, investors are hesitant to buy the debt of the peripheral nations of the eurozone, forcing bond yields to skyrocket. Yields on Italian and Spanish debt passed 6% this week, hitting a record differential to German government bonds.
In response, the European Central Bank announced on Thursday that it would restart a controversial program of buying up the sovereign debt of member nations. The move would ostensibly place the obligations of the peripheral euro member states on to its balance sheet. But this confidence building measure seems to have backfired. Investors fear that the ECB could be biting off way more than it can chew by initiating this second round of bond buying, leading to a false sense of security…
Unlike with the U.S., the European debt contagion appears to be a fast moving disease, which is picking up steam. Investors are trying to position themselves as far away from the contagion as possible, opting to liquidate equities, bonds and commodities into plain old cash. The situation is somewhat analogous to a bank run on the sovereign bonds of these countries, with the ECB acting as the FDIC. But even as hefty as the FDIC is today, it doesn’t have enough cash to bailout every single bank in the U.S…
Meanwhile, in Italy
This from ZeroHedge – EURCHF Crashing After Hours On Italian Bank Run Concerns:
Less than an hour ago, Larry Kudlow [CNBC] tweeted the following: “Sources tell me Italy has to restructure bonds.Deposit run on Italian banks.EU will have to mount Tarp rescue.Big stress on interbank loans.” Basically, this is the worst possible combination for Europe which means that another bailout is not only imminent but has to happen tomorrow. Incidentally Reuters is reporting of an emergency meeting between Sarkozy and Merkel and Zapatero on “the markets” which can only mean damage control following today’s disastrous Trichet performance. Too bad the markets won’t buy it any longer absent some actual actions to back up the deeds. Yet what we are more concerned about is whether or not there really is a bank run in Italy which would be the end of the euro.