1) New highs in German Bunds and U.S. Treasurys. New highs in the U.S. dollar index. Lows for the year in copper. Yields on Spain's 10-year bond at 6.7 percent — a danger zone. A disappointing Italian 10-year bond auction.
Welcome to the euro-summer, year two.
There is no home for cash.
2) German Chancellor Angela Merkel more isolated by the day and in a real pickle. She cannot do any of the things many in Europe want her to do.
Now the European Commission (the executive committee of the European Union) is calling for Eurobonds and direct recapitalization of banks.
The euro ran up, and then ran down, on that news.
Direct recapitalization of banks — by allowing the European bailout fund (European Stability Mechanism) to inject funds directly into European banks without going through sovereign countries — is the hot topic du jour.
There's a simple problem: It can't be done under the current terms of the treaty. The ESM cannot be used as a mere bank bailout tool under the current treaty structure.
There is now a vicious circle between banks and sovereign countries. Banks have lent to the sovereigns, and now both are in trouble. The banks need to be recapitalized, but it is difficult to raise private capital: The other alternative — to have the sovereigns inject money — returns both to that vicious circle.
Direct recapitalization is being touted as the way to break that link. But the Germans have been adamantly against this, using the "moral hazard" argument: That simply giving the banks money from a bailout fund would allow them to avoid the painful restructuring — and writing down of debt — that the banks need to do. And why should other countries' citizens be forced to pay for bad foreign bank loans?
It's the same argument they make against allowing the European Central Bank to become the lender of last resort. Let the ECB open the spigots, and find some way to directly bail out sovereigns (they are not allowed to do so under current rules), and you remove the need for countries to restructure.
What really needs to be done: A euro-wide bank deposit insurance fund. Each member state has one, but what is needed now is a euro-wide fund. That is the only way to stop the run on the banks in Spain and Greece. They will just keep moving euros around from one country to another.
This, too, would require a new treaty, but just announcing a plan would calm things down.
—By CNBC’s Bob Pisani
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