Today's Headlines

Bloomberg:

• Italy Banks Waning Loan Quality Hurts Efforts on Capital. Italian banks are struggling to increase capital levels as fallout from the European debt crisis and the country’s third recession in a decade force them to boost provisions against rising bad loan levels. Italian corporate and household bad debt totaled 109 billion euros ($138 billion) in April, an increase of 15 percent from a year earlier, according to Bank of Italy data. Impairments, excluding writedowns, rose to 58 billion euros from 50 billion euros. “Asset quality and high non-performing loans are growing problems for Italian banks, especially as capital levels and internal capital generation do not provide sufficient buffers,” Francesca Tondi, an analyst at Morgan Stanley, wrote in a June 15 report. “The economy is already frail and credit is clearly not flowing,” she said. Italy’s economy has lagged the euro region for the past decade and is expected to contract 1.4 percent this year, the European Commission estimates. The recession is reducing the ability of borrowers to repay loans, forcing lenders to increase provisions and hurting their profitability. The banks may need as much as 42 billion euros of additional capital to boost reserves for non-performing loans, according to Morgan Stanley’s analysis. Moody’s Investors Service downgraded 26 Italian banks last month, citing weakened earnings and the poor economic outlook.
• Merkel Pushes Back On Direct Bond Purchasing to Overcome Crisis. German Chancellor Angela Merkel declined to commit to direct sovereign debt purchases through the euro-area bailout fund, pushing back on calls by euro-region leaders who backed the measure as a way to ease the crisis. Such a move, while legally possible, “is not up for debate” at present, Merkel said today in Berlin. French President Francois Hollande yesterday championed the idea of using the European Stability Mechanism to purchase indebted countries’ bonds as a way to counter rising yields. Just back from the Group of 20 summit in Los Cabos, Mexico, Merkel said: “I haven’t heard about such things.” “There is no concrete planning that I know about, but there is the possibility of purchasing sovereign bonds on the secondary market,” Merkel told reporters today in Berlin after meeting with Dutch Prime Minister Mark Rutte. “But this is a purely theoretical statement about the legal situation.”
• French State Needs 10 Billion Euros for 2012 Budget, AFP Says. France’s government will need to find 10 billion euros ($12.7 billion) such as through new tax receipts to meet the 2012 budget, French Minister Alain Vidalies told Agence France-Presse. “The fact that we have 10 billion euros missing at the end of June isn’t the responsibility of this government that has started working May 16,” Vidalies, the Minister for Relations with the Parliament, said in an interview with AFP, Le Monde daily and La Chaine Parlementaire today. Vidalies said President Francois Hollande’s government, which is due to unveil a revised budget law next month, will seek to compensate the missing funds by scrapping tax breaks for tax payers, ending a tax holiday on labor charges and raising taxes for the wealthy people, AFP said.
• Greece’s Christodoulou Says Spain May Need Writedown Before Aid. Spain may need to impose losses on bondholders before it would be able to receive a “sizable” bailout from international peers, Petros Christodoulou, former head of Greece’s debt office, said in a BBC Radio 5 interview. “There will be some intervention to stabilize” Spain and Italy’s debt, Christodoulou told the radio station today. “If there is no sufficient stabilization” Europe is moving in the direction that “before sizable official money is poured into a country, there has to be some sort of private-sector involvement,” he said. Christodoulou also said buying of government debt by official institutions is “poisonous for the balance of the debt because this is subordinated to the official money.”
• Julian Robertson Says He's Betting Against the Euro: Tom Keene. Julian Robertson, founder of hedge fund Tiger Management LLC, said he's betting against the euro as the region struggles to resolve its sovereign debt crisis. "I continue to be short the euro against various currencies," Robertson, who once ran one of the biggest and best-performing hedge funds in the world, said today in an interview with Tom Keene on Bloomberg Surveillance. While a lot of investors are betting the euro will fall further, there's no reason to take a contrarian view until policy makers have taken steps to solve the crisis, he said.
• Fed Expands Operation Twist by $267 Billion Through 2012. The Federal Reserve will expand its program to replace short-term bonds with longer-term debt by $267 billion through the end of 2012 as policy makers lowered their outlook for growth and employment. The continuation of Operation Twist “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said today in a statement at the conclusion of a two-day meeting in Washington.
• Job Growth May Fizzle in U.S. as Productivity Gains: Economy. The U.S. economy may be on the cusp of a pickup in productivity that will make it more difficult for Federal Reserve policy makers to reduce unemployment.
• Could Egypt’s Crisis Doom the Arab Spring? From the moment the Egyptian regime was toppled in February 2011, the nation’s military and its Islamic democrats were set on a collision course. Now we’re seeing the crash.

Wall Street Journal:

• J.P. Morgan(JPM) Cuts Derivatives Exposure. J.P. Morgan Chase & Co. this week slashed the size of a position at the center of more than $2 billion in trading losses, according to traders. The New York company so far this month has reduced by $50 billion its exposure to a credit derivatives index known as the CDX.NA.IG.9, according to people familiar with the trading. Much of the reduction came this week, according to traders.
• Food Stamp Fiasco. The next time someone moans about Washington "austerity," tell them about the Senate's food stamp votes on Tuesday. Democrats and a few Republicans united to block even modest reform in a welfare program that has exploded in the last decade and is set to spend $770 billion in the next 10 years. Yes, $770 billion on a single program. And you wonder why the U.S. had its credit-rating downgraded?
  

MarketWatch:

• Let's Be Frank, The Euro's Days Are Numbered. Don’t be fooled by a rallying stock market, where blind hope that a dollar-deluging Federal Reserve will come to its rescue has trumped fundamental analysis these past two days. The world must come to terms with a brutal fact: the euro’s endgame has begun.

CNBC.com:

• 'We Should Be Doing Better,' Welch Says of US Economy. The U.S. economy is missing its full potential because of political stubbornness in Washington and regulations that discourage production, businessman and author Jack Welch told CNBC.
• Housing Isn't a Buyer's Market for Many First-Timers.
  

Business Insider:

• Here's What You Need To Know About The Gun Running Scandal That Could Destroy Obama's Attorney General.
• Jamie Dimon Has Exposed A Huge Financial Loophole.
• 12 Juicy New Details About The Young Barack Obama.
• The 'Skyscraper Index' is Sending a Warning Signal.
  

Zero Hedge:

• Obama Exerts Executive Privilege Over Fast and Furious Fiasco.
• Europe's New, New Math.
• LCH Hikes Italian Bond Margins.
  

Reuters:

• Contagion may drag Italy back to heart of crisis. Italy risks being pulled back to the heart of the euro zone debt crisis as the fallout from a Spanish bank bailout makes market access more expensive even though Italian economic fundamentals are seen as stronger than Spain's. The correlation between moves in Italian and Spanish bonds has risen sharply since March, showing the increased risk attached to holding Spanish debt is feeding through to Italy. Many in markets believe rising borrowing costs will push Spain into a sovereign bailout, damaging investor confidence in lower-rated euro zone debt such as Italy's and depleting the regional funds available if Rome needed assistance.
• Alberta Expects Big Rise In Oil Sands Production.
• Copper extends losses after Fed "Twists" again.

Telegraph:

• Debt crisis: markets bet Germany will be dragged down with everyone else. Nobody ever got rich shorting Japanese government bonds, it is often said. Are those now aggressively shorting German bunds about to fall into the same trap?
• Credit Conditions for Firms Still Deteriorating. Banks are increasingly looking to call in outstanding debts from businesses while new loans are becoming harder and more expensive to secure, the Bank of England has warned.

MNI News:

• France PM Ayrault: To Take Years For Euro Bonds To Be Possible. French Prime Minister Jean-Marc Ayrault on Wednesday said it will take years before the Eurozone reaches the level of political integration necessary for debt mutualization. "A mutualization of debt requires stronger political integration, and this will certainly take some years," Ayrault said in an interview with German weekly Die Zeit.

Frankfurter Allgemeine Zeitung:

• Germany's BVR Banking Assoc. opposes a European banking union as it would provide wrong incentives, citing Gerhard Hofmann, a board member of the organization. A grouping of risks, losses and debt among euro-area banks would go too far and a common European deposit guarantee would be at the detriment of German savers, he said in an interview.
  

Boersen-Zeitung:

• Spanish Prime Minister Mariano Rajoy has failed to win support for this request to allow direct recapitalization of the country's banks through the euro region's financial backstops, citing Brussels-based European Union officials it didn't name.
  

Bild:

• German federal lawmakers may be forced to return to parliamentary session in Berlin over the 10-week summer recess if Spain's debt woes worsen, citing politicians. The summer recess begins on June 29.
  

Die Zeit:

• The German govt is skeptical about giving the European Stability Mechanism a banking license because it's concerned this would give states direct access to the printing press, citing German finance officials.
  

Ansa News:

• The possibility of Italy leaving the euro area if the ECB doesn't start printing euros is not "blasphemy," former Prime Minister Silvio Berlusconi said in Rome today. "The alternative is that member states return to their own currencies," Berlusconi said. This is not "desirable" but it would allow Italy "to increase exports with a competitive depreciation without repercussions on the domestic market."