Has the limit been reached on bailouts?

Have we finally reached the limit on bailouts?  The Wall Street Journal's Richard Barley wrote an interesting column summarizing why Europe might have reached its limit as now France is coming under pressure.  The ongoing debt ceiling debate in Washington suggests that the US might have reached its limit too.

If we are finally approaching the limit, this means we must finally be nearing the end of the Bush-Paulson policy adopted at the start of the solvency crisis in 2007 of protecting banks from losses.  Instead, having had three years of exceptional earnings with which to recapitalize themselves, banks will now have to absorb the losses from their investment and lending decisions.

Is the euro-zone apple rotten to the core? 

Greece, Ireland and Portugal are on bailout lifelines. Cyprus, significantly exposed to Greece through its banks and hit by economic and political turmoil, may be next. Spain has called early elections as it battles with its budget deficit and, along with Italy, is under the market microscope. Repeated emergency summits and pledges to protect the euro have fallen flat. 

Cracks may now be emerging at the heart of the euro zone as government bond markets distinguish between French and German debt. French 10-year bonds, at 3.22%, now yield 0.68 percentage point more than German securities, far more than the 0.3-0.4 point gap seen for much of the year, and a level that has only been seen in the months following the collapse of Lehman....

But that doesn't mean there isn't cause for concern. France has vulnerabilities: Of the six triple-A-rated countries in the euro zone, it has the highest deficit, 7% of gross domestic product in 2010, and the second-highest debt, at 81.7% of GDP. 

The International Monetary Fund warned this week that France might have to take more measures to hit budget targets in 2012-2013. France is vulnerable to slowdowns in Spain and Italy, and its banks are exposed to debt in those countries. 

Other problems aren't directly of its making: the euro-zone crisis and the policy response to it. Each country that becomes affected simply reduces the number of options European government bond investors have, as well as increasing the strain on the strong countries that are on the hook to fund rescues.