The Bank of America maneuver to protect their European derivatives seems like a component of the larger strategy in Europe, as they ready their giant bank bailout:

France and Germany have reached agreement to boost the eurozone’s rescue fund to €2tn (£1.75tn) as part of a “comprehensive plan” to resolve the sovereign debt crisis, which this weekend’s summit should endorse, EU diplomats said.

The growing confidence that a deal can be struck at this Sunday’s crisis summit came amid signs of market pressure on France following the warning by the ratings agency Moody’s that it might review the country’s coveted AAA rating because of the cost of bailing out its banks and other members of the eurozone. The leaders of France and Germany hope to agree a deal that will assuage market uncertainties or, worse, volatility, in the run-up to the G20 summit in Cannes early next month.

€2 trillion was the expected number from the last month or so. Somehow, the leadership thinks they can do this without having to go through European Parliaments, through a scheme leveraging private investment up like a CDO and acting as an insurer, handing out guarantees for senior bondholders. This has been described as lighting a can with explosives before kicking it down the road. So of course, that’s the plan. It also includes recapitalizing European banks for €100 billion, which the banks would need to cover themselves through raising funds (though I suspect they will go to their national governments for at least some of the money). And then there’s a large haircut on Greek debt. The idea is that this will entirely stabilize the system, with enough firepower to prevent contagion. Of course, it makes the EFSF bailout fund ITSELF susceptible to contagion by making it a financial instrument .

At this point I’d like to reserve some time for some scorn of Angela Merkel, who has helped bring the world to the brink of collapse.

Appearing on a Sunday talk show recently, Chancellor Merkel defended the Greek bailout, characterizing the measure as necessary to ensure the stability of the euro as well as “buying time” for Greece to recover. At the same time, she has often railed against the notion of a “debt union.” It would not be the first time that Merkel, who is often characterized as more pragmatic than visionary in her leadership style, has sought the political middle ground, but in this case, her cautious approach has hindered prospects for a broad and durable solution, one the German public could be convinced to support […]

Merkel’s inability to offer more decisive leadership may have a great deal to do with the restiveness within her own conservative coalition. So far, that coalition is holding together, but its appetite for more aggressive measures is questionable. Yet, if Merkel’s coalition were to collapse—and the current unpopularity of her partners the Free Democrats’ indicates that it will—it could well be replaced by a center-left regime willing to support stronger action to solve the debt crisis.

Merkel hasn’t seen mass protests or riots in Germany, although there is mass confusion about her leadership. She probably has more ability to put together both the necessary and proper policies to resolve the crisis, but she faces internal politics and an unwillingness to take a stand on much of anything. The dithering has caused a lot of pain and suffering for the citizens of Europe.

David Dayen

David Dayen