Signs the global economic recovery is faltering and Europe’s fiscal crisis is spreading added to investor concern that banks will have difficulty in clawing back the $2.4 trillion they’re owed by that region’s most indebted nations.

The cost of insuring against a default on financial-company bonds surged, with the Markit iTraxx Financial Index of credit- default swaps linked to the senior debt of 25 European banks and insurers climbing 6 basis points to 189, according to CMA DataVision in London, near the highest level since March 2009. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments fell 1.5 basis points to 167, compared with the record-high 174.4 reached on June 4.

Europe’s debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Corp. data. A U.S. jobs report at the end of last week fell short of economists’ forecasts, while a spokesman for Hungary’s prime minister said it was “no exaggeration” to suggest the eastern European nation may default.

“The market is so volatile right now, it’s ready to blow up on any headline no matter how meaningful it should be,” said Aziz Sunderji, a credit strategist at Barclays Capital in London. “People are extremely risk-averse.”

Read More: – By John Glover, Bloomberg

Every once in a while, the term “shadow inventory” makes it into the business headlines. Invariably, stories warn of a looming flood of foreclosures that will drag the housing market down as soon as homeowners begin to feel optimistic again.

But what is shadow inventory — and is it really such a big threat?

Different experts have different definitions. Some only include homes that have already been repossessed by banks and are awaiting distressed sales. Others include those whose owners are long-overdue on mortgage payments, while others still count homes whose owners would like to sell but are waiting for conditions to improve.

8 Million More Foreclosures May Be Waiting

“The definition of shadow inventory has gotten out of control,” says Rick Sharga, senior vice president at RealtyTrac, an online market for distressed homes.

As a result, estimates of homes in the shadows vary widely between 2 million and 8 million. By comparison, approximately 5.5 million homes are expected to change hands this year, of which about a third are in some kind of distress.

High estimates usually include include repossessed homes that have not yet been listed for sale, homes that have been moved from the delinquent bucket and into foreclosure, and homes that are more than 60 days delinquent.

Read More: – By Dahlia Fahmy, ABC News

It might seem that the banking sector’s bailout saga is nearing its close, leaving room to focus on other catastrophes like the European debt crisis or the Gulf oil spill, but some small banks across the country that benefited from TARP are still struggling to stay afloat, and many more will likely fail.

And while the Treasury Department and the Obama Administration have justifiably lauded TARP for preventing another catastrophic bank failure, the fact that hundreds of smaller TARP recipients are missing their dividend payments suggests that these banks should never have received government money to begin with.

Illinois-based Midwest Bank was the fourth, and latest, TARP recipient to fail on May 14, bringing the total taxpayer loss for the failures to over $2.6 billion. The FDIC stated in its quarterly banking profile last week that its list of problem banks had grown to 775 from 702 at the start of this year. And the office of the Special Inspector General for TARP (SIGTARP) reported in April that 104 TARP banks have missed at least one, and in some cases, several, dividend payments to the U.S. Treasury.

One bank, Saigon National of California, is dangerously close to missing six dividend payments, which would give the Treasury department the right to elect two directors to the bank’s board. Roy Painter, Saigon’s chief financial officer, explained to Fortune that the bank has not paid its TARP dividends because it has not received approval from the Office of the Comptroller of the Currency (OCC) to make the payments. While Painter declined to explain why the OCC has not granted approval, it is likely because Saigon, like the hundreds of other small TARP recipients, lacks sufficient capital.

Read More: – By Scott Olster, Fortune

Fitch Ratings cut Spain’s credit ratings to AA+ from AAA on Friday, saying its economic recovery would be more muted than the government forecast, pushing world equities and the euro lower.

The downgrade follows a cut by another agency Standard and Poor’s last month and heaps more pressure on the government, battling to reassure markets its fiscal, political and social woes will not end up in a Greek-style debt crisis.

Fitch said Spain’s deleveraging of record-high levels of household and corporate debt and growing levels of government debt would drag on economic growth.

“The downgrade reflects Fitch’s assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term,” Fitch’s analyst Brian Coulton said in a statement.

Read More: – Reuters

Two years after Vallejo, Calif., filed for bankruptcy protection, officials in nearby Antioch are also tossing around the ‘B’ word.

Antioch’s leaders earlier this month said bankruptcy could be an option for the cash-strapped city of roughly 100,000 on the eastern fringe of the San Francisco Bay area.

Antioch’s fiscal woes are standard issue for local governments in California: weak revenue from retail sales and property taxes is forcing spending cuts, layoffs and furloughs.

But cost-cutting measures may not be enough to keep Antioch’s books balanced, so its city council is openly discussing bankruptcy.

“We just want to alert people to the possibility,” Antioch Mayor Pro Tem Mary Helen Rocha said.

Orange County Treasurer Chriss Street would not be surprised if more local governments across the Golden State sound a similar alarm.

Street expects more talk of municipal bankruptcy across California because local government finances are in such dire shape — a situation underscored on Wednesday when a top finance officer for Sacramento County projected a worse-than-expected shortfall for the county of $181 million, which could force more than 1,000 layoffs from the county’s payroll.

Read More: – Reuters

As European politicians fight to contain the debt crisis, the United States could see a similar situation within the next decade, Josh Bolten, former Office of Management & Budget [OMB] director told CNBC on Friday.

“What’s going in Europe is a preview of what the United States could be if we don’t get our own fiscal house in order relatively soon,” he said. “We need to get a hold of it very soon before the credit markets start to come after the United States’ credit rating.”

Bolten said that during the George W. Bush years, when Bolten was OMB director from 2003-2006, the OMB often testified against “unsustainable” federal spending.

Although the Obama administration has a higher proportion of its budget allocated towards taxation, said Bolten, spending has dwarfed what gains have been made in tax revenue.

Read More: – By Natalie Erlich, CNBC.com

The Western multinationals that have dominated global trade for decades are going to have their lunch eaten in China and elsewhere, and many are unaware it’s about to happen.

That’s the warning in “The End of Free Markets” (Portfolio, $26.95), a new book by political risk expert Ian Bremmer.

Bremmer, known for showing the effect of political turmoil on financial markets, argues that China, Russia and other emerging markets have developed a new economic model — state capitalism — that clashes with the free-market system of the West.

State capitalism is not the rebirth of socialist central planning, he writes. It is a system in which authoritarian states dominate markets primarily for political gain. In the process, they favor national enterprises over foreign competition.

A grasp of state capitalism is essential if Western businesses are to understand its potential effect, argues Bremmer, the founder of political risk consultants Eurasia Group.

Read More: -By Herbert Lash, Reuters

The US government now estimates that up to 25,000 barrels of oil a day are spewing from BP’s Gulf of Mexico well, meaning the spill has already far eclipsed the previous worst U.S. oil spill, the 1989 Exxon Valdez disaster.

BP [BP-LN  520.80     28.80  (+5.85%)] wrestled Thursday to plug its the gushing deepwater well as President Obama prepared to announce he was extending a moratorium on new deepwater oil drilling.

U.S. Geological Survey Director Marcia McNutt said various government teams examining the oil spill in the Gulf of Mexico estimated the flow ranges from 12,000 barrels (504,000 gallons) to 25,000 barrels per day.

Read More: – Reuters

The percentage of corporate bonds considered in distress surged this week to the highest since 2009 as investors dumped debt of the neediest borrowers on concern Europe’s fiscal crisis will make it harder for them to refinance.

More than 17 percent of junk bonds yield at least 10 percentage points over Treasuries, up from 9.2 percent last month, Bank of America Merrill Lynch’s Global High-Yield Index shows. The jump is the biggest since the distress ratio rose 11 percentage points in November 2008, two months after Lehman Brothers Holdings Inc. collapsed. Bonds of MGM Mirage and Freescale Semiconductor Inc. joined the list this month.

U.S. distressed bonds have lost 10 percent in May, according to the indexes, as credit markets seize up amid speculation Greece and other nations in Europe with rising budget deficits won’t be able to meet their debt payments. Junk bond sales plunged this month to the lowest level since March 2009, data compiled by Bloomberg show.

Read More: – By Bryan Keogh and Kate Haywood, Bloomberg

The United States’ M3 money supply reportedly is plunging at an accelerating pace similar to that in 1929 to 1933, despite near-zero interest rates.

The M3 data — which include a broad range of bank accounts and are tracked by British and European experts for danger signs about the U.S. economy — began shrinking a year ago, London’s Daily Telegraph reported. That race has since picked up speed.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6 percent, the report said. The assets of institutional money market funds fell at a 37 percent rate, the sharpest drop ever.

“It’s frightening,” Professor Tim Congdon, from International Monetary Research, told the newspaper.

“The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

Read More:- By Frank McGuire, Moneynews