Daily Digest 6/30 - Looking For Patient Bond Buyers In Europe, Reluctance Over Medicaid Expansion
The worldwide derivatives market is starting to show some cracks, and at some point this is going to become a major disaster.
Remember, the 9 largest U.S. banks have a total of more than 200 trillion dollars of exposure to derivatives. When this bubble completely bursts it is going to be impossible to fix.
It is a paradox that lies at the heart of the European debt crisis. On Friday at its most recent summit meeting, Brussels took a halting first step to addressing this issue on a permanent basis. Euro zone leaders proposed that Europe’s current and future rescue facilities might buy Italian and Spanish bonds as long as these countries fulfilled Germany’s austerity demands and met debt and deficit targets. The market, expecting more waffling, jumped and the yields on 10-year Spanish and Italian bonds dropped sharply as investors celebrated the prospect that Europe might become a buyer of last resort of its beaten-down bonds.
The Italian leader came to Brussels with a simple plan based on the knowledge that Europe’s leaders could ill afford to come away from the summit meeting empty-handed. Italy and Spain, as he eventually made clear to Ms. Merkel, would block all agreements — including a growth pact that they fully supported — until European leaders agreed to allow Europe’s new bailout funds to directly recapitalize ailing banks, rather than going through the governments.
That potential gap will probably lead to ferocious statehouse battles in the coming year, as states weigh whether to accept billions of dollars in federal aid to pay for expanded coverage. The health care industry, sensing the skepticism in some states, is preparing a campaign to persuade state officials to accept the money for coverage of the uninsured.
Leaders of the 17 euro-area countries agreed banks can be recapitalized directly by bailout funds, rather than having aid channeled through governments, and dropped a requirement that emergency loans to Spanish lenders get preferred credit status, Van Rompuy said after 12 hours of talks ended at 4:30 a.m. in Brussels. The two-day summit concluded yesterday and Luxembourg Prime Minister Jean-Claude Juncker said “short-term measures” are being considered to bring down borrowing costs for Spain and Italy.
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