Today's Headlines

Bloomberg:

• EU Bailout Seen Falling Short, Pressuring ECB. Europe’s effort to expand its bailout fund to 1 trillion euros ($1.3 trillion) is falling short, forcing renewed consideration of a role for the European Central Bank in insulating Spain and Italy from the debt crisis, two officials familiar with the discussions said. Finance ministers are holding an initial discussion today on channeling ECB loans to cash-strapped euro nations through the International Monetary Fund, aiming to bring the central bank onto the front lines without violating its ban on direct lending to governments, said the people, who declined to be identified because the talks are at an early stage. With renewed prodding from the U.S., European leaders are pondering a fifth “comprehensive” fix after an October blueprint failed to stop a widening rout in Italian markets or quell speculation that France will lose its top credit rating. Germany is pushing for governance changes at a summit next week that would tighten enforcement of budget rules, a move that might make it easier for the ECB to step in. The rescue fund “alone will not be able to solve all the problems,” Luxembourg Finance Minister Luc Frieden told reporters before tonight’s Brussels meeting. “We have to do so together with the IMF and with the ECB in the framework of its independence.” The first leveraging option, using the EFSF to insure 20 percent to 30 percent of new bond sales, faces a credibility test in the markets and may not be ready until January. It also might splinter the Italian and Spanish bond markets, by creating insured bonds that are more attractive than bonds currently trading, the people said.
  
• ECB Fails to Attract Sufficient Bids to Mop Up Liquidity From Buying Bonds. The European Central Bank failed to fully offset the extra liquidity created by its bond purchases for the first time in seven months, a sign of mounting tensions among euro-area banks. The Frankfurt-based ECB said today that 85 banks bid a total of 194.2 billion euros ($259 billion) for seven-day term deposits. It had aimed to drain 203.5 billion euros, the amount its bond purchases have created since the program began in May last year. It last fell short of its intended total on April 26. “It’s just another indication of how uncertain the situation is,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “At the moment, banks are holding more cash than necessary. There’s a lot of caution.”
• Dollar Funding Costs at '08 Levels Flag Sustained Credit Crunch. The cost for European banks to fund in dollars rose to the highest level since October 2008 for a fifth day, indicating a longer-lasting credit crunch than that following the collapse of Lehman Brothers Holdings Inc. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 154 basis points below the euro interbank offered rate at 1:40 p.m. in London, from minus 149 basis points yesterday. The gap has widened from as little as minus 8 basis points on May 4. Banks face more sustained funding pressure compared with 2008, because investors “are panicking about the exposure to sovereign debt and any fallout from a potential breakup of the euro,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “Until the political mess is resolved and there is clarity on the future of the euro, banks are going to be shrinking their balance sheets, hitting economic growth in the process,” he said. The one-year basis swap was at 103 basis points under Euribor, compared with minus 104 basis points yesterday, data compiled by Bloomberg shows. The Euribor-OIS spread, a measure of banks’ reluctance to lend to one another, rose one basis point to 94 basis points, data compiled by Bloomberg shows. The spread, which is the difference between the borrowing benchmark and overnight index swaps, was at 98 basis points on Nov. 3, the widest since March 2009. Lenders increased overnight deposits at the European Central Bank, placing 281 billion euros ($375 billion) with the Frankfurt-based ECB yesterday, up from 256 billion euros on Nov. 25.
• Italy Pays More Than 7% at Bond Auction. Italy was again forced to pay above the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts when it sold 7.5 billion euros ($10.1 billion) in bonds today, short of the maximum target for the auction. The Rome-based Treasury sold 3.5 billion euros of a new three-year bond, 2.5 billion euros of 2022 bonds and 1.5 billion euros in 2020 bonds, just shy of the top range of 8 billion euros for the sale. The 2014 note yielded 7.89 percent, the highest since September 1996 for a three-year bond and up from 4.93 percent when similar-maturity debt was sold last month. “Italy is paying a considerable premium for its debt and today’s auction confirmed the recent trend,” Annalisa Piazza, an economist at Newedge Group in London, said in a note. “If we want to look at the ‘bright’ side, the Italian Treasury managed to allocate a big size of its debt today.”
• American Airlines' AMR Corp.(AMR) Files Bankruptcy. American Airlines parent AMR Corp. (AMR) filed for bankruptcy after failing to secure cost-cutting labor agreements and sitting out a round of mergers that dropped it from the world’s largest airline to No. 3 in the U.S. With the filing, American became the last of the so-called U.S. legacy airlines to seek court protection from creditors. The Fort Worth, Texas-based company, which traces its roots to 1920s air-mail operations in the Midwest, listed $24.7 billion in assets and $29.6 billion in debt in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan.
• Fed's Lockhart 'Skeptical' of Bond-Buying. Federal Reserve Bank of Atlanta President Dennis Lockhart said expanding securities purchases is unlikely to give a sufficient boost to U.S. growth, without ruling out the strategy or other easing options. “I am skeptical that further asset purchases will produce much gain in terms of increased economic activity,” Lockhart, who votes on monetary policy next year, said in a speech in Atlanta. “I don’t believe further bond purchasing by the Fed is a potent policy option given the set of circumstances we currently face.” Lockhart, speaking at an economic outlook conference sponsored by the University of Georgia’s Terry College of Business, said that “at this time my notion of appropriate monetary policy” is “holding steady” the benchmark federal funds rate near zero and keeping the balance sheet “steady at current scale.”
• U.S. Consumer Confidence Rises Most Since '03. The Conference Board’s index increased to 56 from a revised 40.9 reading in October, the biggest monthly gain since April 2003, figures from the New York-based private research group showed today. The gauge exceeded the most optimistic forecast in a Bloomberg News survey.
• How Paulson Gave Hedge Funds Advance Word of Fannie Mae Rescue.
• China's Exports to Europe 'Falling Off Cliff': Chart of the Day. The CHART OF THE DAY shows how the cost of hauling goods to Europe from China is falling faster than rates for deliveries to the U.S. The price for shipments to Europe is down 39 percent to $511 per twenty-foot box since Aug. 31, according to figures from Clarkson Securities Ltd., a unit of the world’s largest shipbroker. That’s more than double the 18 percent slide in the cost to the U.S. West Coast, measured in 40-foot units. “European imports from China will be much, much lower going forward,” said Rahul Kapoor, a Singapore-based analyst at Platou Markets. “If you see falling freight rates, that would imply that European demand is falling off a cliff.”
• Chinese Solar-Panel Makers Seen Shrinking to 15 in 5 Years on Supply Glut. China’s solar-panel supply glut is consolidating the industry and will likely slash the number of domestic manufacturers to 15 within half a decade, according to a research group at the nation’s top economic planning agency. Some producers have cut factory capacity or closed plants because of the surplus, Li Junfeng, deputy director general of the Beijing-based Energy Research Institute at the National Development and Reform Commission, said in an interview. “There’ll be no more than 15 large manufactures left in five years,” Li said by phone, without identifying them. There were 330 panel makers in China in 2008, according to the Chinese Renewable Energy Society, which said it stopped counting as it couldn’t keep up with the “multifold” increase since then.
• Goldman(GS) Says Exit China Stocks as '12 GDP Dims.
• Shanghaied Home Buyers Turn Protesters as Shattered Dreams Vex Government.
• Iran Protesters Storm UK Embassy as Ties Deteriorate Over More Sanctions. Iranian protesters stormed the British Embassy’s sites in Tehran, calling for “death to the U.K.” and burning its flag, a week after the U.S. and Britain imposed more sanctions over Iran’s nuclear program. “It amounts to a grave breach of the Vienna Convention, which requires the protection of diplomats and diplomatic premises under all circumstances,” U.K. Foreign Secretary William Hague said in a statement. “I spoke to the Iranian foreign minister this afternoon, to protest in the strongest terms about these events and to demand immediate steps to ensure the safety of our staff and of both embassy compounds.”
• Oil Rises Above $100 in N.Y. on Iran Tensions. Oil rose above $100 a barrel in New York after U.S. consumer confidence climbed by the most in more than eight years and Iranian protesters broke into and vandalized the British Embassy’s compound in Tehran. Crude oil for January delivery rose $1.58, or 1.6 percent, to $99.79 a barrel at 12:30 p.m. on the New York Mercantile Exchange. The contract climbed to $100.06 during the session. Prices are up 9.2 percent this year. Brent oil for January settlement gained $1.85, or 1.7 percent, to $110.85 a barrel on the London-based ICE Futures Europe Exchange.

Wall Street Journal:

• Euro-Zone Contagion To Core May Spark EUR 1 Trillion Outflows - Nomura. Unless euro-zone leaders come up with a solution to the currency union's financial and fiscal woes, foreign investors could offload more than EUR1 trillion of euro-zone bonds in the coming months, Nomura warned in a research note dated Monday. Without a quick, workable solution, Nomura's optimistic view is that potential sales of euro-zone debt by private foreign investors could reach EUR544 billion, or EUR416 billion if investors hold on to German exposure. "This pace of liquidation is consistent with the recent pace of cross-border asset sales in Italy and Spain, and it would be less than the amount of liquidation observed in Greece and Portugal to date," noted Jens Nordvig and Yujiro Goto, currency strategists at the bank. In the extreme case where reserve managers follow suit, Nomura estimates that the impact could be nearly double at just over EUR1 trillion. "These numbers are clearly very large, and lack of market liquidity makes it hard to liquidate in this size. However, we think this is still a scenario to consider seriously to gauge potential selling pressure," Nordvig and Goto added. Nomura is rapidly becoming one of the most pessimistic banks on the euro zone, having recently published research notes on the legal ramifications of a euro-zone breakup and the possibility of returning to some form of accounting unit if such an event occurred.
• Obama Abandons the Working Class.
  

MarketWatch:

• Tiffany's(TIF) Outlook Pinched by Europe, U.S.

CNBC.com:

• Commodities Bearish in 2012: Socgen. (video)

Business Insider:

• John Taylor: The Euro Situation Is Worse Than I Could Have Dreamed. John Taylor, manager of the hedge fund FX Concepts, was on Bloomberg TV this morning discussing the euro.
• Strapped Consumers Still Forking Over Thousands On Pet Care.
• Never Before Seen Video Shows Obama Revealing The Real Origin Of His Book Title.
  

Zero Hedge:

• Financial Bonds Are Hit By Deleveraging - Basis At 2008 Levels. (graph)
• Goldman's Sigma X Spot On Once Again: Predicts Imminent UK Contagion.
  

Financial Times:

• Germany Set to Overtake Italy in CDS Protection. “The fact that net notional CDS outstanding on Germany is looking set to overtake Italy at $20bn [last week] may raise some eyebrows,” particularly after last week’s “failed” auction of German government debt, JPMorgan analysts wrote in a note to their clients. They added that, if current CDS trends continued, Germany would overtake France as the most insured country by mid-January.

Telegraph:

• UK Autumn Statement: Proof That A Lack Of Growth Leads To Carnage. Ouch. If you wanted to know exactly how expensive weak growth is to the economy, the Chancellor’s Autumn Statement has provided the answer. Crippling. Over the five years from 2011/2012 to 2015/2016, the Government will have to borrow £111bn more than had been expected just nine months ago. The reason? Because the Government will raise about £156bn less in tax than had been forecast.
• Debt Crisis and George Osborne's Autumn Statement: Live.
  

Guardian:

• Euro Crisis: Italy at Risk of Insolvency, European Finance Ministers Warned. Mario Monti must tackle Italian tax evasion to avoid other eurozone economies being damaged, says report. European finance ministers were warned on Tuesday night that Italy's liquidity crisis could leave the eurozone's third biggest economy insolvent with devastating impact on the fate of the single currency and its big core economies, Germany and France. Eurozone finance ministers met in Brussels in their latest attempt to plot a path out of the EU's worst crisis. With Mario Monti, the new Italian prime minister and finance minister, reporting to the session on his austerity package aimed at saving Italy and shoring up the euro, a confidential report from the European commission and the European Central Bank said Monti would need to do more than already promised. The report, obtained by the Guardian, said Monti had to go further in his promises to combat rampant tax evasion in Italy, which is estimated to amount to 20% of gross domestic product. "The sovereign debt crisis has now moved from the periphery to Italy and other core euro area countries. Pressure on Italian sovereign bond yields is particularly acute, reflecting investors' mounting concerns with the sustainability of Italy's large public debt" – almost €2tn, (£1.7tn) – the report said. "The risks of a full-blown sovereign liquidity crisis can increase rapidly in the absence of a determined policy response … Persistently high interest rates increase the risk of a self-fulfilling 'run' from Italy's sovereign debt. A liquidity crisis could then turn into a solvency crisis, whose repercussions for other large euro area countries would be very acute given their exposure to the Italian economy."

Die Welt:

• German banks have less money available for loans than a year ago, citing calculations carried out by Thomson Reuters on behalf of the newspaper. That threatens the supply of credit to companies and private clients.

Project Syndicate:

• China 'Not Yet Near Hitting Rocks,' Yu Yongding Writes. Despite the high likelihood that China’s economic growth will slow significantly in 2012, a hard landing is unlikely. Nevertheless, while there is no need to be overly bearish about China’s short-term economic prospects, because of the slow progress in fundamental adjustment and further reform, even Chinese Premier Wen Jiabao has noted that China’s growth is ultimately unsustainable. The real test has yet to come.

Haaretz.com:

• Former MI Chief: Iran Has Enough Material For 4 or 5 Nuclear Bombs. Amos Yadlin says Israel must maintain 'good channels of dialogue and understanding' with Western elements better capable of dealing with the Iranian threat.