Europe's Bailout: From Bad To Worse

The E.U. commissions desperate  trillion dollar bailout-attempt is not working at all. Since the measures was announced on May 9th, the euro have depreciated about 7% against the dollar.  Bond spreads have widened, and are now in some cases above the levels before the rescue package was launched.

“The problem has been contained.”

Dominique Strauss-Kahn

I have commented on the IMF-leaders perception of the financial crisis before (see related posts) and will let them off the hook this time. I’ll just settle with pointing out that the “problem” is far from “contained” – in fact, it’s even worse than before the biggest bailout-operation in the history of Europe was announced.

This is really a terrible indictment.

Following a decline after the initial reports of the EU/IMF €750 billion package and ECB bond purchases, peripheral euro area bond spreads (over German bonds) have widened.

In particular, the bond spreads for Italy and Spain have widened the most relative to their levels before the rescue package was unveiled.

After initially declining four weeks ago, sovereign debt spreads have begun widening for peripheral euro area countries.

As of June 9, the 10-year bond spread stands at 554 basis points (bps) for Greece, 258 bps for Ireland, 265 bps for Portugal, and 211 bps for Spain.

The spread to Italian bonds has increased 76 bps since May 11, from 1% to 1.75%, while Portuguese bond spreads are 112 bps higher during the same period. U.K. bond spreads are essentially unchanged.

Source: Calculated Risk

Similarly, CDS spreads have widened after the initial response to the stabilization package.

After declining following the policy response, the bond and CDS spreads have resumed their steady climb.

Source: Calculated Risk

Is this what IMF Managing Director Dominique Strauss-Kahn meant by “contained“?

As for the euro, the common currency is now trading around 1,21 against the dollar, down from $1,31 on May 10th.

That’s a depreciation in the neighborhood of 7%. (But, hey, that’s good for exports, right?)

“Irregular Growth”

What’s going on inside the ECB at the moment is anybody’s guess.

According to Bloomberg News the ECB will extend its offerings of unlimited liquidity and keep purchasing government bonds.

But Jean Claude Trichet refused to give more details on the bond purchases at yesterday’s press conference, and remains secretive about the details of its operation.

However, Trichet says the ECB plans to offer further help to banks struggling to raise cash in money markets as he announced that interest rates will be kept at 1%.

The European Central Bank is know for speaking in code when it wants to communicate something to the market.

Certain expressions usually means specific things;  like “heightened alertness” – means that a rate hike is possible, but not certain.

“Strong vigilance” is another ECB code that means something is going to happen – usually an adjustment of the central banks key rate.

But yesterday Jean-Claude Trichet presented the market with another mysterious expression – “irregular growth” – as the ECB revised down its 2011 economic growth forecast for the euro zone, to 1,2% from 1,5%.

Whatever the expression “irregular growth” is supposed to signal, is being discussed in today’s edition of LeMonde.

Related by the Econotwist:

E.U. Parliament To Investigate Euro Zone Bailout

ECB Announces Bailout Program

Bailout Euphoria Is Evaporating

In The Bright Minds Of IMF

Why Optimists Are Wrong About The Euro Zone

Goodbye Keynes – Hello Ricardo!

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