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Quick Unraveling of European Bailout Solution Drives Bond Yields

Again a definitive European solution to the debt crisis has collapsed like a house of cards exposing leadership to ridicule.
By Amiel Ungar
First Publish: 11/1/2011, 6:58 AM

As a result of the financial crises that have made headlines, the public, including this writer, is more aware of global economics than before. 

When the European Union announced its "ultimate" financial fix, I, a layman, was confused as to how this provided a true solution. But who was I to question the experts on the stock exchanges who were enthusiastically pushing up securities prices upon hearing the latest plan from Brussels?

I therefore spoke with my neighbor Dr. Joseph Templeman who teaches economics at the college of management in Rishon Lezion. I asked him to explain to me in layman's terms how €250 billion could be leveraged into the equivalent of €1,250,000,000,000 for the bailout fund. To my surprise he concurred with my skepticism and belief that it was smoke and mirrors.

Today that assessment was shared by the financial community. Italian and Spanish bonds, which the plan was to immunize, were vulnerable, and Italian bonds were trading at the highest level of interest since Italy joined the euro.

The rout would have been even greater if not for intervention by the European Central Bank that bought Italian and Spanish bonds. The ECB has been buying Italian bonds since August to lower interest costs, but the climbing interest rates threaten to nullify this major financial effort. Another country, Belgium, joined the ranks of the problematic countries as a result of a disappointing bond auction.

It also appears that financial experts who last week were perhaps reticent to avoid accusations of sowing panic and unduly influencing the market, were now giving expression to their disbelief.

Fund manager Stuart Thompson called the EU plan "a massive confidence trick… It is trying to disguise risk and the fact they don't have any money."

The Economist weighed in and claimed that the EU leadership actually desires a magic "money tree" to provide the missing money.

China figured as the deus ex machina-- the unexpected outside force that could balance the financial equation. The Chinese apparently want either European guarantees that they won't end up holding the losses or painful political concessions. It will take time to forge any agreements with China and therefore Europe is essentially back to where it started before announcing the plan.

That, too, could prove to be an over-optimistic assessment given the failure of yet another ultimate plan. This time it unraveled even faster than the previous plans, taking a huge toll in credibility. The point may be nearing where an economic debt crisis translates into a total bankruptcy of political capital.