OH NO! More of the Same

Via Reuters:

Worries over the euro zone debt crisis and the region's banks hit global stocks and boosted the dollar on Wednesday after Italian lender UniCredit priced a rights issue at a huge discount and a German bond auction failed to impress.

The U.S. dollar index, which tracks the greenback against a basket of currencies, gained 0.6 percent to 80.10 points.

Banking sector fears were ignited by news UniCredit (CRDI.MI) had launched a 7.5 billion euro ($9.8 billion) two-for-one rights issue at a discount of 69 percent to its closing share price on Tuesday. The capital increase, meant to shore up its ravaged balance sheet, sent shares in Italy's largest bank by assets down 8.5 percent.

Germany sold 4.057 billion euros ($5.30 billion) of 10-year government bonds in its first auction of the benchmark maturity since one last November that raised fears Europe's debt crisis had begun to threaten its biggest economy. Bids for the Bunds amounted to 1.3 times the amount offered and were improvement over the previous sale - one the country's least successful debt since the introduction of the euro. The debt sold at an average yield of 1.93 percent, lower than the 1.98 percent from November.

In another sign of stress among euro zone banks, commercial lenders' overnight deposits at the European Central Bank hit a record high of 453 billion euros, data showed on Wednesday. However, key euro zone bank-to-bank lending rates continued to drop, pulled down by the ECB's recent record injection of almost half a trillion euros of ultra-long and ultra-cheap three-year liquidity. Euro zone banks received 489 billion euros late last month in the first of two opportunities to access the long-term loans.

Reuters article

Anyone who has read anything I have written here or on Seeking Alpha knows my opinion on this:  the situation is a train wreck. Austerity is necessary (not just in Europe either), but it is a mid to long term solution.  The ECB can QE all it wants, the banks are keeping the cash (or arbing vs sovereign debt) and not lending it out.  The banks have thin capital (especially if you adjust their risk/market models) and need a ton more.

While some European banks look cheap, I am not a buyer (LT2 will get interesting though), preferring instead to but European corporates in USD or hedging the currency risk.