European Bailout May Offer Investors One More Chance to Bail Out

Last Updated May 19, 2010 4:14 PM EDT

The European Union's 750 billion-euro support program for the euro and euro zone financial markets appears to be working as well as I predicted even before the details were disclosed. That means not very much.

The euro resumed its slide after an initial if ephemeral leap when the rescue package, worth nearly $1 trillion, was announced on May 9. The currency sank to a four-year low Tuesday night, trading at about $1.214, before recovering to $1.24 on rumors that the Swiss central bank was buying euros to weaken its overvalued franc.

Stock markets in Europe and elsewhere have also fallen sharply after a similar short-term bounce. There's a reason they call it a bailout: Investors used the fleeting, euphoric rise ignited by the announcement of the aid package to bail out of their positions.

A move by Germany on Wednesday to ban short-selling, a bet that prices will decline, on the stocks of some German financial institutions helped propel market indexes to fresh lows - not what authorities had in mind. The problem with such a ban is that it signals to the markets that German finance officials think there's something wrong with the country's banks. Why else would they need to be protected?

The euro and regional markets have been beaten up so badly that they're probably ready for a respite. While words don't seem to be doing the trick, European governments may be able to orchestrate a rally with the billions of euros at their disposal.

Don't be surprised if they start conspicuously hurling some of the cash at stocks, bonds and the currency itself. If they do, it's unlikely to provide more than a short-term fix, however, and the short term seems to be getting shorter all the time. Any rally is unlikely to last, but it may offer yet another opportunity to bail out of European investments.