IMF Euro Bail Out Attempt Flops

The International Monetary Fund announced a new facility for members to address a short term liquidity crisis. The measure is aimed at beleaguered Europeans girding themselves for a steady worsening of their sovereign debt crisis in the hope of “breaking the chain of contagion.”  But the measure is more of a squirt gun than a bazooka.

Specifically, the IMF has offered 6 month liquidity of up to 500% of member quotas, and 1-2 year liquidity of 1,000%. This means that governments will have more money to buy back their own bonds to support the credit markets, facilitate interbank lending, or to nationalize banks. The international agency is hoping that this strategy will help halt the decline in European lending and halt the alarming shrinkage of the money supply, all bad for an economy clearly headed into recession.

The problem is that the amounts mentioned, some $345 billion, are a mere drop in the bucket when considering the vast scale of Europe’s problems. You can’t solve a leverage problem with even more leverage. And Europe can’t count on any US participation this time around, as the American mood to bail out anyone these days is greatly diminished.

The news was enough to ignite a one cent pop in the Euro up to $1.352, when it then quickly gave back. That leaves my latest short position in the Euro grinding around slightly profitable levels. Remember, I have been dumping all over this currency since it peaked at $1.60 some 2 1/2 years ago, and again when it topped this year at $1.49.

If we get a nice little post-thanksgiving “RISK ON” rally, as I expect, then I may have to take some heat on the position, as the Euro will almost certainly rally along with everything else. Those who missed my last trade alert should use this as another opportunity to sell, as the medium term outlook for the continental currency is grim, at best.

 

It Appears the Bailout is Not Working

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