On Tuesday, global stocks rallied as investors chose to focus on the 'good news' coming out of Greece and ignore the very bad news coming out of Spain. (See: Stocks Rise Even as Spain Starts to Follow the Greek Script)
Wednesday was a completely different story: Stocks tumbled as Spanish bond yields rose and the price of credit default swaps on Spanish debt hit record levels. Meanwhile, Italy's auction of 5- and 10-year securities was met with weak demand.
In recent trading, the Dow was down 158 points, or 1.2%, while major bourses in Europe fell between 1.8% and 2.2%.
The declines come amid renewed chatter about the possibility of a TARP-style program to recapitalize European banks. U.S. Treasury Undersecretary for international affairs Lael Brainard is reportedly lobbying EU officials to use its roughly $878 billion bailout fund for this purpose and EU Commission President Jose Manuel Barroso made similarly themed comments, Reuters reports:
Tighter euro zone integration could include a joint bank deposit guarantee scheme to prevent a bank run and euro area financial supervision, saying the mood had changed since member states unanimously rejected a joint deposit guarantee fund only months ago.
"In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the ESM (European Stability Mechanism) might be envisaged," the report said.
While controversial, the TARP program and, later, the stress tests, did help put a floor under the U.S. banking system in 2008-early 2009. Rob Cox, Americas Editor for Reuters Breakingviews, says the Europeans should follow a similar path, if only the EU's laws would allow it.
"The idea you can put together 17 countries in the Eurozone and all throw their banks into some sort of TARP-like mechanism? It ain't going to happen," Cox says.
As with the euro itself, the idea of a euro-TARP runs into the problem of the lack if fiscal unity in the eurozone. Because of laws preventing the direct bailout of banks, EU policymakers have, to date, resorted to indirect bailouts via funds for sovereign nations, which are then directed to local banks.
"All the things you're seeing are backdoor rather than front door mechanism" because the Europeans are "nowhere near true fiscal unity," Cox says.
To date, Europe's woes have resulted in strength in the dollar and lower borrowing costs for the U.S. government. But that is a double-edged sword, according to Cox.
" With 1.8% 10-year money we can continue to borrow ad infinitum it seems without having to deal with our own problems, which are, of course, quite severe," he says. "It gives us a little too much oxygen to do all sorts of bad things." (See: U.S. Can Avoid "Shooting Ourselves in the Face": Laura Tyson's Rx for the Fiscal Cliff)