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

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

Most economists agree the Great Recession has been over for almost a year, and that the U.S. economy is not poised to fall into a “double dip” recession.

But the problems in Europe have some people questioning just how strong the U.S. economy really is. There are clearly economic fault lines.

Jobs: Employers are finally hiring once again, adding more than a half-million jobs over the past six months. More gains are expected in the months ahead.

But it’ll take years to fully regain the 8.3 million jobs lost over the past two years. Unemployment is still near 10% and when part-time workers looking for full-time work and discouraged job seekers are counted, the underemployment rate is 17.1%.

Read More: – By Chris Isidore, CNNMoney.com

Federal Reserve Governor Daniel Tarullo said Europe’s debt crisis poses a threat to the U.S. and world economies as trade shrinks and banks incur losses on European investments.

“A deeper contraction in Europe associated with sharp financial dislocations would have the potential to stall the recovery of the entire global economy, and this scenario would have far more serious consequences for U.S. trade and economic growth,” Tarullo said in testimony prepared for delivery today to House Financial Services subcommittees.

A weeklong selloff in stocks deepened as reports in the U.S. raised doubts about the strength of the economic recovery and leaders in Europe struggled to contain the region’s debt crisis.

The losses pushed the Standard & Poor’s 500 Index down 2.7 percent to 1,084.48 at 11:21 a.m. in New York, a move below the 200-day moving average level that some traders say could trigger more declines. The Stoxx Europe 600 Index plunged 2.8 percent, and the S&P GSCI Index of commodities tumbled to the lowest since October.

Read More:-By Joshua Zumbrun, Bloomberg

Although price pressures are currently muted, the United States will get an uptick of inflation over the medium term, the world’s biggest bond fund management company said on Thursday.

Extensive money printing by central banks to buy securities in emergency measures, such as those the European Central Bank recently announced to stabilize euro zone government bond markets, will ultimately stoke inflation, wrote Mohamed El-Erian, CEO and co-CIO of Pacific Investment Management Co., or Pimco, in a three- to five-year “Secular Outlook” summary.

“This potential evolution from disinflation to inflation will likely proceed at different speeds in different parts of the globe. It is already well in train in emerging economies and will remain so,” El-Erian wrote.

This week, gold rose to a record above $1,240 an ounce on concerns about the European sovereign debt crisis.

Flight into gold can also reflect investors’ concerns about the potential for paper currencies to depreciate because of central banks’ money printing and worries that inflation could gain momentum.

Read More: – Reuters

European leaders still don’t understand what caused the Aegean Contagion that swept through the eurozone in late April and early May. Swedish Finance Minister Anders Borg blamed “wolf-pack behavior” by speculators. Others have railed against clueless rating agencies, feckless debtors, and unreasonable creditors. Then there are those who ask if there’s an inherent flaw in the bond markets that made them cascade, turning vague worries into scary, self-fulfilling prophecies.

You can’t defeat an enemy you don’t understand, and unless Europe gets a better grasp on what went wrong, it will be vulnerable to more turmoil, even with the nearly $1 trillion backstop lending authority that calmed markets. “I still think it’s a very fragile situation,” says Gary Gorton, a Yale University economist.

The reality isn’t all that complicated. Europe was vulnerable to contagion, and remains so, because its governance and its financial system are weak. It was lax fiscal oversight that allowed nations such as Greece to violate European Union rules on the size of their budget deficits in the first place. Overleveraged investors made matters worse: When the value of their Greek debt fell, they were forced to reduce the size and risk of their portfolio by selling other assets—the debt of Portugal and Spain, for example.

Read More: – By Peter Coy, Businessweek

Businessweek.com compiles comments from Wall Street economists and strategists on the key economic and market topics of May 7.

Kim Rupert and Michael Wallace, Action Economics

Treasuries have caught a bid after yields jumped a couple of basis points following the better-than-expected jobs data. Some traders focused on the less impressive stats out of the report, including the flat earnings figure and the rise in the unemployment rate. But mostly the recovery in Treasuries is a result of ongoing uncertainties over the situation in the euro zone periphery [amid] skepticism the Group of Seven industrialized nations will come up with anything meaningful for the near term. According to U.S. officials, they seem to believe after today’s conference call that euro zone officials now have a better appreciation for the problems and are examining all options.

Meanwhile, [credit] spreads have blown out again, volatility is rising, while losses in stocks have deepened.

Nick Bennenbroek, Wells Fargo Bank

Currencies are for the most part correcting Thursday’s moves, in what nonetheless remain very volatile trading conditions. Most European currencies are higher, including the euro, with regional data firm and the German Upper House—importantly—approving the bill on financial aid for Greece. European leaders meeting in Brussels today, and there is a press conference scheduled for tonight European time. The pound is sharply lower, however, with the U.K. general election resulting in the hung Parliament that opinion polls had predicted.

Read More: – By Businessweek.com Staff

Spain’s jobless rate has risen over 20 percent for the first time since 1997, the government said Friday — more dismal news for a recession-plagued economy that is being dragged into Europe’s debt crisis.

The National Statistics Institute said the rate rose 1.22 percentage points in the first quarter to 20.05 percent.

While other major economies in Europe and elsewhere have posted at least tepid growth as they crawl out of recession, the eurozone’s fourth-largest economy is still contracting after the collapse of a construction boom that had fueled years of expansion.

The agency said at the end of March, there were over 4.6 million people out of work in the country. The jobless rate is the highest since the last quarter of 1997, when it stood at 20.11 percent.

Since Spain slipped into recession in 2008, the rate has roughly doubled, a dramatic development for a country that had been one of Europe’s top job-creators.

Read More: -By Daniel Woolls, the Associated Press

A widening financial crisis in Europe is threatening to put a damper on the economic recovery here and abroad just as the American economy is gathering steam.

A credit contagion that began in heavily indebted Greece spread Wednesday to Spain, whose economy is much larger than Greece’s, as Standard & Poor’s cut the Madrid government’s credit rating, just one day after slashing Athens’ bonds to “junk” status and downgrading Portugal’s debt as well.

European officials pledged Wednesday to act swiftly on a hefty package of loans for Greece, but skepticism remained that Germany, the continent’s strongest economic power, would ultimately agree to the plan.

Even under the rosiest scenario in which a rescue package comes through and the problem is contained, analysts say, European economic growth will slow as more countries feel pressure to raise taxes and take other tough measures to get their fiscal affairs in order.

Read More: – By Don Lee, Los Angeles Times

Morgan Stanley analyst Teun Draaisma recommends that investors use “tactical caution” for the next three to six months.

The European equity analyst called for investors to sell stocks in June 2007 when the markets were flashing a “full house sell” signal. He then flipped bullish in November of 2008 as the markets were pricing in a much more severe situation than Draaisma saw unfolding.

“We recommend selling into strength, and we think MSCI Europe will reach 1,030 at some point later in 2010, down 11 percent from here,” Draaisma writes in a note to investors.

“The last 12 months have been characterized by record stimulus and rising economic leading indicators,” Draaisma says, adding that Morgan Stanley reduced its equity exposure two months ago.

Read More: – By Julie Crawshaw, Moneynews