Why Europe's latest rescue plan won't work

Activists of the Occupy Frankfurt movement have set up a fireplace near the Euro sculpture in front of the European Central Bank in Frankfurt, Germany Nov.3, 2011. The ECB announced to lower their key interest rate to 1.25 percent.
AP Photo/Michael Probst

COMMENTARY Today's move by the world's major central banks is supposed to make it easier for European banks to borrow dollars. This is supposed to calm investors and depositors so they don't start a bank run and collapse the EU financial system. This is the second time in two-and-a-half months they've tried this desperate move and it already looks to be failing.

The action by U.S. Federal Reserve, Bank of Canada, Bank of England, Bank of Japan, European Central Bank and the Swiss National Bank makes it easier for European banks holding dollar-denominated securities or making dollar loans to get U.S. currency. In exchange for all those dollars, the other banks will get euros. Nobody else wants them, that's for sure.

The move was taken because there is no liquidity within the EU banking system. 


Practically no one is buying bonds from any EU nation except Germany. This has been going on for awhile.  I've been tracking bonds from Italy, Greece and Portugal for several weeks and there is very little volume. So while the press has been reporting that Portuguese two-year bonds are trading for more than 18 percent, they really aren't. If no one is buying the bonds then the yield could be infinity for all we know. The market is supposed to tell us that information and there is no market. That's the real information.

Italy actually managed to have a "successful" bond auction today. It was successful as long as you don't look at who bought them or at what price. As the Wall Street Journal reports:

The auction of $10 billion in bonds over a range of maturities saw Italy paying yields of 7.89% on three-year bonds and 7.56% on 10-year paper. Despite the record yields, the auction attracted enough demand--driven mainly by domestic buyers, analysts said--to cover the amount on offer.

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"Domestic buyers." It has gotten so bad that governments in at-risk nations are leaning hard on their nations' banks to either buy the bonds or at least stop selling them. Governments are even asking ordinary citizens to buy the bonds. Haven't they been hit hard enough?

People are so desperate to find a safe place to stash their cash that German one year bonds are currently trading in the negative. In English that means investors are paying the German government to hold their money for them.

The central banks tried this very same action on Sept. 21st. If it had worked then they wouldn't be doing it again today. The reason it isn't working is because it doesn't fix the fundamental problems of European government debt that are the cause of the problems. Until that is addressed investors - quite reasonably - won't be willing to commit money.

Some news outlets are currently reporting that today's stock market surge shows investors think this idea will work. Go check the volume of trades being made. It is very low. This is a case of making a wave in a very shallow pond.

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.