In a direct statement overnight the European Commission has said it would consider directly recapitalizing troubled European banks via the European Stability Mechanism (Europe's permanent bailout fund) in an attempt to boost their capital and stabilize banking sectors.
For those just joining us, similar action was taken in the United States way back in 2008 in the form of the Trouble Asset Relief Program (TARP) following the collapse of Lehman Brothers and the ensuing carnage. Without dwelling on whether or not TARP was effective, the benefit of similar action in Europe is that it would ideally financially separate struggling banks from the sovereign nations who themselves are facing tremendous pressure and scrutiny from markets. Of course, such laissez-faire use of funds would be heavily scrutinized by countries like Germany or the Netherlands, and certainly would not pass without much discussion and certain conditions being met. It would nonetheless be a step in the right direction of avoiding what could cause the greatest immediate threat to global markets - contagion or a potential failure of financial institutions. A refusal do so would force recapitalization via new debt issuance, an expensive and difficult solution.
Regardless, the strain on the common currency zone is continuing to show - and deepen. A less-than-fully-subscribed Italian bond auction sold 5.73 billion EUR worth of bonds at rising yields over 6% - well short of the intended full target. Spain yields also pushed towards the 7% euro-era high and their stock market has touched a nine-year low. The increase in yields and spreads would indicate that debt markets are testing the danger zones previously seen in late 2011 and early 2012, an area of discomfort and nervousness for many investors.
To no one's surprise, the doom and gloom is weighing heavily on the euro. Trading to a new 22-month low against the USD overnight, the currency is struggling to catch a bid and establish itself on solid ground given continued sour sentiment in the region.