Rising Rates In Spain Does Not Bode Well For European Union Or The Global Economy...

Chart of The Day: France vs Italy Government Bond Spreads Widen...

Concerns over the ongoing European debt crisis continue to weigh on the markets.

For some perspective, today's chart compares the 10-year government bond yield of the 2nd (France) and 3rd largest (Italy) euro zone economies to that of the largest (Germany).

As today's chart illustrates, the crisis for these two relatively large economies really began to escalate in Q2 2011 and again in Q4 2011. Note how the French 10-year government bond spread really began to increase over the past couple months as the severity of the Italian situation began to approach extreme levels.

This is due in large part to the fact that French banks hold a great deal of Italian sovereign debt – and Italy has a great deal of debt outstanding (€1.9 trillion which equates to $2.6 trillion).

While there are clearly no good solutions to the crisis, one of the least bad solutions has the European Central Bank printing out significant amounts of euros in order to buy a significant amount of European debt.

Chart & Commentary Courtesy of Chart of The Day

Greece? Just The Tip of The Sovereign Debt Crisis Iceberg?

According to economist Nouriel Roubini, the sovereign debt crisis will get worse and bond vigilantes could move on to even bigger economies like the United States and Japan when they are done sweeping through vulnerable European nations.

"The recent problems faced by Greece are only the tip of a sovereign-debt iceberg in many advanced economies,” Roubini told readers of his RGE Monitor website. "Bond-market vigilantes already have taken aim at Greece, Spain, Portugal, the United Kingdom, Ireland, and Iceland, pushing government bond yields higher.” “Eventually they may take aim at other countries – even Japan and the United States -- where fiscal policy is on an unsustainable path," he wrote.

Roubini said he fears failure to learn the lessons of the credit crisis will simply mean a bigger, more dangerous crisis is just around the corner. "There is a lot of talk about better regulation and supervision of the financial system but the financial industry is back to business as usual -- rebuilding leverage, engaging in prop trading and other risky behaviour, compensating bankers and traders with indecent bonuses -- and is lobbying against better regulation and supervision,” he said.

Roubini also says he believes that those who claim it is impossible to see an asset bubble coming are misguided. Bubbles are easy to see coming and have had similar characteristics since Tulip mania hit the Netherlands in the 17th century, he said.

"An asset bubble -- often in real estate or in stock markets or in a new industry -- leads to financial euphoria, excessive risk taking, an accumulation of excessive debt and leverage,” Roubini wrote. “So the signposts of this phase -- asset boom and bubble, followed by the eventual bust and crash - are highly predictable if one looks at the economic and financial indicators that show the build-up of such excesses."

Commercial Real Estate Is The Next Crisis

The Congressional Oversight Panel said in a report that mounting commercial real estate losses could endanger the banking system and thwart economic recovery.

A total of $1.4 trillion in commercial real estate loans will require refinancing in the next 4 years, and more than 50% of those loans are underwater, written for properties whose value has dropped like a rock.

The expected losses when loans go bad could hit between $200 billion to $300 billion and threaten 3,000 small and mid-size banks with a disproportionate share of commercial real estate assets on their books, according to the panel.

The report is intended to "wave a red flag" to the White House and Congress that the commercial real estate loan market is going to get a lot worse before it gets better.

"We're at a point where even as TARP is ramping down another major challenge in our economy is ramping up," said Elizabeth Warren, the oversight panel's chairwoman.

"We need to start now, before the system is on the brink of collapse to figure out a plan," she added.

The Panel's research found that 2,988 banks are heavily invested -- with more than 3 times their assets tied up -- in commercial real estate loans. Of that number, 2,500 banks each have less than $1 billion in assets.

The Panel offers a number of possible solutions for policymakers to head off a commercial real estate crisis, including stress tests for banks, injecting capital into these small banks, buying their toxic assets, or guaranteeing loans.

WSJ - Government Now Rooted In The Economy - Bailout Mentality

In 2008 and 2009, Washington strove to save the economy.

In 2010, Americans will get a clearer picture of how Washington has changed the economy.

Only as the recession recedes will it become fully evident how permanently the state's role has expanded and whether, as a consequence, a new, hybrid strain of American capitalism is emerging.

One thing is clear: The government is a much bigger force in today's U.S. economy than it was before the financial crisis.

"The frontier between the state and market has shifted," says Daniel Yergin, whose 1998 book "Commanding Heights" chronicled the ascent of free-market forces starting in the 1980s. "The realm of the state has been enlarged."

Washington pumped $245 billion into nearly 700 banks and insurance companies, guaranteed almost $350 billion of bank debt, made short-term loans of more than $300 billion to blue-chip companies, propped up life insurers and money-market funds, bailed out two of the three U.S. auto makers, lent billions trying to jump-start commercial-real-estate, small-business and credit-card lending, and in two February stimulus bills enacted a year apart, committed $955 billion to rouse the economy.

Today the U.S. government, directly or indirectly, underwrites 9 of every 10 new residential mortgages, nearly twice the percentage before the crisis.

Just last week, the U.S. Treasury said it would cover an unlimited amount of losses at mortgage giants Fannie Mae and Freddie Mac through 2012.

John Taylor, a former Bush Treasury official who is now a Stanford University economist, says the government's role will be huge. "While we may be past the emergency, we're still in a mode that will create similar interventions for quite a while, even for minor emergencies," he says. "We have a bailout mentality in this country."

Even if the government withdraws, business will expect bailouts in the next crisis, and that will inspire another round of cavalier risk-taking.

"If we don't re-regulate the banking system properly, we'll either get very slow growth from overregulation, or another financial crisis in just 10 to 15 years," says Kenneth Rogoff, a Harvard University economist and co-author of a new book on financial crises since the Middle Ages.