Europe banks hit as Italy stokes contagion fears

(Reuters) - European banks were battered by mounting fears Greece is heading for a disorderly default and the debt crisis could spread to Italy, sending shares skidding more than 3 percent Tuesday to a two-year low.

Early losses were pared after Italy successfully sold short-term bonds and the panic eased. But bank stocks were still on the defensive and down over 10 percent in the last seven trading days as politicians have failed to find a fix for Greece and as investors fear this week's health check on 91 banks could show up more holes in the industry.

Euro zone finance ministers Tuesday said a flexible rescue fund to help Greece could buy back its debt, but they set no deadline to act and failed to calm investor nerves. They also declined to rule out the possibility of a selective default by Greece to make its debt mountain more sustainable.

"Things are clearly going from bad to worse. It took too long to stabilize Greece and now the contagion is spreading. There is certainly a fundamental element in the worries about Italy. The debt load is high and growth is lackluster," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

By 0923 GMT the STOXX Europe 600 bank index .SX7P was down 1.1 percent at 172.6, after falling as low as 168.02, its lowest level since May 2009.

Italian bank Unicredit (CRDI.MI) fell over 7 percent and Intesa Sanpaolo (ISP.MI) lost 4 percent, before turning higher aided by a short-selling ban by Italy's regulator and news Italy

had sold its targeted 6.75 billion euros of 12-month bills in a bond auction. By 0955 GMT Unicredit and Intesa were each up 2 percent.

Unicredit shares are still down by a fifth since July 1 as borrowing costs for Italy have soared on fears about the scale of the country's debt.

Alessandro Frigerio, fund manager at Milan's RMJ Sgr, said the recovery was helped after Economy Minister Giulio Tremonti said he would wrap up an austerity package.

"Finding a solution is tough, but the markets are saying in a tough situation you have to take the devil by the horns... Right now we're in a phase that is not manageable anymore because Italy right now, when it goes to the market, has to pay 6 percent (in 10-year bonds) and that's a very, very difficult level," Frigerio said.

Andrew Lim, analyst at Espirito Santo in London, added. "Italy and Spain have been thrown into the mix and they are far bigger in magnitude than Greece, Ireland and Portugal. This could be a true systemic crisis. This is a very real threat and the panic feeds on itself."

As borrowing costs rise, the repayment of debt becomes more costly to maintain and could lead to an economic slowdown and more losses for banks.

Barclays (BARC.L), BNP Paribas (BNPP.PA), Deutsche Bank (DBKGn.DE), Lloyds (LLOY.L), UBS (UBSN.VX) and Credit Agricole (CAGR.PA) all fell over 2 percent.

In Portugal banks also reversed steep early losses and were up over 1 percent in volatile trade. Shares in the country's largest listed bank Millennium bcp (BCP.LS) were up 1.2 percent on the day at 0.33 euros after a near 6 percent slump in early trade down to record lows of 0.305 euros.

Euro zone finance ministers Monday promised cheaper loans, longer maturities and a more flexible rescue fund to help Greece and other EU debtors in a bid to stop financial contagion engulfing Italy and Spain, but there are fears the rescue effort is unraveling. They will continue their meeting Tuesday.

"They could have taken care of this a year ago, a month ago or a week ago. They didn't and now it's spreading to other markets," said Oon-Marc Valahu, a fund manager at Geneva-based firm ClairInvest.

The market fall could continue as long as uncertainty remained over how Europe's politicians would deal with the debt crisis, he said. "The market hates instability and you can't stop the market from going down on fear."

The Institute of International Finance, which is leading talks on a private sector contribution to Greece's rescue, wants the EU to pledge to buy back debt to provide a longer term solution to Greece's mountain of debt, rather than just a quick fix.

The release of the result of a stress test on European banks is another worry. It could show holes in the capital position of some banks and analysts said another fear is that a weak test could fail to restore confidence.

"We've got the solvency tests being released Friday, which is why everyone's a bit nervous. The market is short the banks, which has been an easy trade," said Andrew King, head of equities at BNP Paribas Asset Management, which has 551 billion euros in assets under management.

SPANISH FAILURES?

Some Spanish banks could fail the stress tests, Spain's Economy Minister Elena Salgado said Monday, backtracking from earlier comments that all Spanish banks would pass. This year's test will not include generic provisions -- funds set aside during good times to provide a buffer in bad times -- which will hurt Spanish lenders as they had 27 billion euros of generic provisioning at the end of March.

Six Spanish banks have failed the European stress tests, including five savings banks and one medium-sized bank, ABC newspaper said Tuesday, citing unnamed sources. The Bank of Spain declined to comment.

"It depends who has failed -- it would have to be one of the medium-sized listed banks to have a big shake on the sector. Smaller savings banks failing would have less of an impact," said Tania Gold, analyst at UniCredit.

The impact of problems in Italy would be felt more widely. Overseas banks had $1.1 trillion of exposure to Italy at the end of December, with France's banks accounted for $389 billion of that, or 35 percent, according to data from the Bank for International Settlements.

Jury foreman explains Casey Anthony acquittal

The jury foreman is now talking about why Casey Anthony was acquitted of murder.

The foreman oversaw jury deliberations, which lasted more than 10 hours.

He spoke to Fox News, but wanted his identity kept private.

After more than 30 days of testimony, he says there are still too many unanswered questions.

"We don't know the cause of death and that was one of the major issues we had addressed. We don't know the cause of death. Everything was speculation."

One point of contention was Casey's car.

The state says Casey killed Caylee, then hid her daughter's body in the trunk of her Pontiac Sunfire.

The car was eventually abandoned by a dumpster and towed.

When George Anthony picked it up, he testified that it smelled like death.

However, there was conflicting testimony from other witnesses who were called to the stand.

"Some people smelled it, some people did not smell it," the foreman said. "So as far as whether or not the body did actually decomposition in that trunk, there is evidence that there could have been the decomposition in there, but again we were looking more towards the cause and the who and the how with that car. You know, there were a lot of people that could get access to that car."

George Anthony is one of them.

The defense argued that George knew more about Caylee's death than he was letting on.

"He had very selective memory for me and that, in itself I always kept in the back of my mind. For every time that he got up there I was just kind on guard for that."

The foreman says the jury was suspicious of George, but didn't believe the allegations of sexual abuse.

He's unsure if George played any role in dumping Caylee's body in the woods.

"I don't know how it got there, how Caylee got there, I can't tell you how or who, but ultimately the body ended up there."

Then there's the question of the duct tape found at the scene.

Prosecutors say it was put over Caylee's mouth and nose to suffocate her.

The jury foreman says he didn't buy the defense's argument that the tape was planted at the scene.

"The one thing that I never really bought was the duct tape was placed at a later time," the foreman said. "You can look at that duct tape and tell that it has been aged. But as far as where the duct tape was, the initial point of where the duct tape was when the body was found that was argued and that's where a lot of the discrepancy was."

With so many unanswered questions the jurors decided to acquit Casey Anthony.

She'll be released from jail Sunday.

Defense attorney Cheney Mason fears for her safety.

Another White House Debt Meeting to Begin With No Deal in Sight

President Obama will meet once again with congressional leaders to discuss the nation’s debt Tuesday, after Monday’s White House session made little progress other than to identify how far apart the sides are from striking a deal.

"I don't see a path to a deal if they don't budge. Period," Obama told reporters before the talks.

During Monday’s discussions, the president also offered to raise the Medicare eligibility age from 65 to 67 as part of a larger deficit-reduction package, a move sure to anger congressional Democrats who want to exclude entitlement programs from the negotiations.

Democrats already have criticized Republicans over proposed cuts to programs such as Social Security and Medicare, and with Obama showing he is open to program changes, some Democrats are taking a hard line.

"As long as the entitlement programs are part of a cut program, I can't support it," Rep. Raul Grijalva, D-Ariz., told Fox News, calling such cuts a political and fiscal "mistake."

"Medicare, Medicaid, Social Security -- we should deal with them ... separate and beyond the discussions that tie their existence to this debt ceiling discussion."

As bipartisan talks continued Monday, two sources outside the White House confirmed to Fox News that Obama, during an earlier meeting with lawmakers Sunday night, offered to raise the Medicare eligibility age. There was also discussion of moving to a system that ties the Medicare qualification age to actuarial tables rather than a determination by Congress.

However, lawmakers could not agree on the subject since it would have been part of a deal that included tax increases -- something Republicans vehemently oppose.

Monday was the third round of bipartisan talks since last week, and Obama urged both sides to give ground. He called out Democrats for resisting entitlement cuts and Republicans for resisting tax increases.

"If each side wants 100 percent of what its ideological predispositions are, then we can't get anything done," he said.

He particularly criticized rank-and-file Republicans for allegedly hamstringing House Speaker John Boehner, claiming those members have complicated the talks by taking "irresponsible" positions.

"I think he'd like to do something," Obama said of Boehner, calling him "very sincere." "But his politics in his caucus are very difficult. That's the problem with a political process where folks are rewarded for saying irresponsible things."

He said a "my way or the highway" approach will not produce a deal.

But Boehner, minutes before the meeting began, said the reality is that a deficit-reduction package that raises taxes simply cannot pass the House.

"Adding tax increases to the equation doesn't balance anything," Boehner said. "The American people understand that tax hikes destroy jobs."

Boehner, describing the policy divide between the two parties as a "gulf," suggested that Democrats still weren't putting enough on the table in terms of entitlement reform.

After a head-spinning few days, Obama made clear he still wants a "serious" deal to prove to Americans that "this town can actually do something once in a while."

"Now is the time to deal with these issues," Obama said. "If not now, when?" He also urged lawmakers not to settle for a "stopgap solution" on the debt ceiling.

"We don't manage our affairs in three-month increments," Obama said. "We're going to resolve this, and we're going to resolve this for a reasonable period of time. And we're going to resolve it in a serious way."

The unsteady talks have taken several turns in recent days. After the White House built up hopes after Thursday's meeting about the possibility of a "grand bargain" dealing with everything from discretionary spending to entitlements to tax reform, Boehner on Saturday urged all sides to lower their sights and focus on a deficit-reduction package worth far less.

Republicans claimed Democrats would not back off their call for tax hikes and would not get serious about entitlements. Democrats, though, said they were in favor of a big deal all along and claimed Republicans were backing out only because they didn't want tax hikes.

The Obama administration claims lawmakers must raise the cap by Aug. 2 or risk the U.S. defaulting on its obligations.

Ahmad Wali Karzai assassination 'huge propaganda boost for Taliban'

By Arvind Ramakrishnan, Deputy Head of Asia Forecasting at Exclusive Analysis

It is as yet unclear who was responsible for Ahmad Wali's assassination. Even if it was carried out, as one report suggests, by a body guard with a personal grudge, it will certainly be exploited by the Taliban for propaganda purposes and will damage fragile public confidence in Karzai's government.

Ahmad Wali was one of the two key government players in the important southern province of Kandahar, which the insurgency would likely have considered as priority targets for assassination. The other is the police chief, Brigadier General Abdul Razik, another powerful Pashtun.

Wali was the de facto governor of Kandahar, eclipsing the influence both of the official governor and the provincial council, of which he was chairman. The provincial council does not wield any real authority.

Neither does it have direct control over appointments to, or deployment of, security forces, even in Kandahar City. Ahmed Shah Khan, an influential Pashtun tribal elder could well emerge as Ahmad Karzai's successor on the council (since the deputy chairman was also killed in this attack) in the provincial council, in the form of a consensus candidate. He is very unlikely to exert the overarching political and economic influence that Ahmad Karzai exerted through his financial clout, and close ties to the US.

His assassination is likely to drive home a very stark message to the Afghan population, that the Afghan state under President Karzai is incapable of providing security, even for its own leadership. As such, this will make it much harder for Nato to persuade the local population to switch their allegiance to the Afghan government as ISAF forces begin to hand over the security lead to Afghan.

RELATED ARTICLES

• Hamid Karzai's brother killed in Afghanistan 
  12 Jul 2011
• Ahmed Wali Karzai: profile 
  12 Jul 2011

The immediate commercial impact of his death will be felt by the string of businesses owned by the 'King of Kandahar,' as the staunchly pro-US Ahmad Karzai was known; their future is now unclear. These include influential private security companies, such as Watan Risk Management and Asia Security Group, which have contracts with ISAF for protecting its supply convoys.

The latter also runs its own a private paramilitary unit in the province – the Kandahar Strike Force that assisted US Special Forces and the CIA to seek out and kill senior Taliban insurgents. Ahmad also owned or ran a string of hotels, real estate companies and even a Toyota car dealership.

He will also be remembered for the extensive narcotics empire that he ran from Kandahar, under the aegis of the provincial government. The smuggling operations he set up are unlikely to fracture in his absence.

The Taliban are also quite likely to exploit the 'sense of shock' in Kandahar City by launching another major attack in the coming days. Ahmad Karzai's funeral is a likely target, especially as this will be attended by prominent government and security force figures, and will be another test of the effectiveness of Afghan and ISAF security measures.