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Europe’s $1tln bailout money just a temporary fix, but many hope it will work

Wednesday, May 12, 2010
Opalesque Industry Update – The European Central Bank plan to infuse at least $1tln through a rescue package to ease fears of a market collapse and assist ailing members of the European Union may have buoyed the markets, but many fear it is just another “temporary fix” that does not provide a permanent solution to prevent the same problem from happening again.

Speaking during an appearance on BBN’s Headline with Howard Green, Ron Ianieri, chief market strategist at financial consulting firm Ion Options, likened the European fund to the TARP (Troubled Asset Relief Program) introduced by the U.S. government in 2008 at the height of global financial crisis with the aim of reviving the national economy.

But, he said that such a program is not a fix for the problem but is rather “putting a bandage on the bullet wounds and not getting the gun from the people doing the shooting.” He added: “We have to start with legislation, and prevent the guy from shooting and not just bailout when he starts shooting again.”

He added that in the U.S., the Bush administration introduced the first TARP program, thinking that the money was sufficient to bailout the economy. But, the US was ultimately forced to increase bailout funding (expanding the original $365bn to $700bn) when it became clear more economic bolstering was needed. The same could happen in Europe if policy makers would only think of bailout, he said.

Bailout to work
In the same program, Vincent Deluard, Global Equity Strategist at TrimTabs Investment Research, said that markets across the globe responded positively to the bailout news. In fact, he said that the euro was up on Monday as news of the $1tln rescue package was announced.

“The market's feeling everybody will be bailed out. So far, it is working out,” he told BNN.

Deluard found an ally in International Monetary Fund (IMF) chief Dominique Strauss-Kahn who said on Tuesday that he had "no doubt" the EU bailout package for Greece would help, the country address its fiscal problems and set it back on a path for growth, reported SMH.com.au.

"I have no doubt the program that has been built by the Europeans with our support for Greece is a program that would put Greece out of trouble. It's a very difficult program, a very tough program for the Greeks, but it is the right way to go back on track," said Strauss-Kahn in Zurich.

Where will the money come from?
Gavin Graham, global strategist at Excel Funds Management, said that while the markets’ initial reaction was positive, it was still too early to celebrate. He said that the more compelling question now is, where will the money come from? Ed Devlin, Executive Vice President at global asset management firm PIMCO, said that the money could come from the European Central Bank.

He added that in the last week, the markets saw the European Union getting their acts together to come up with a relief package. “It's not inconceivable to see these people act more decisively again (to find the money for the bailout),” Devlin said.

Europe slow to act on the problem
However, other managers see continued risk. Ianieri expressed concern that the EU may have acted “too late and too slow” in addressing the Greece debt and fiscal problems, that they had grown so large even a $1tln rescue package is not enough.

In an article published in Hindustan Times, Landon Thomas Jr. & Jack Ewing, also criticized the “lateness” of the EU’s response.

The two authors also criticized the program because it may create the impression that other countries could allow their budget deficits and debt loads to balloon, with the precedent set that they would be bailed out later.

European debt crisis downplayed
American hedge fund manager, John Paulson, head of head fund giant Paulson & Co., has downplayed the sovereign debt crisis in Europe and described it as “manageable.”

His sentiment was shared by Dietmar Schmitt, founder of London-based boutique called SAM Capital Partners, which runs a European equity L/S hedge fund, who is still bullish on European prospects despite the crisis (See: Opalesque Exclusive: Why it is possible to be bullish on Europe right now here).

He said that the markets were holding quite well, and said the problems facing Europe lies in the state of finances but added the banks were now fairly well capitalized compared to year or two ago.
-Precy Dumlao

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