Trichet, Euro bailout bought time that’s all, nothing more

Observation more than books and experience more than persons, are the prime educators.

Amos Bronson Alcott,1799-1888, American Educator, Social Reformer

There is a need for a quantum leap in the governance of the euro area,” European Central Bank (ECB) President Jean-Claude Trichet told Der Spiegel magazine.

Echoing his call, ECB Executive Board member Juergen Stark said turbulence in the euro zone would calm down only if member countries reformed their economies and cut their deficits.

“We have bought time, nothing more,” he said in an interview with the Frankfurter Allgemeine Sonntagszeitung.

Euro zone governments agreed a 750 billion euro ($1 trillion) rescue last weekend to end a crisis of confidence in the euro triggered by financial problems in Greece, which had threatened to envelop the region’s much bigger economies.

“It is not an attack on the euro,” he said. “It is clear that it is the primary responsibility of the Europeans to take the appropriate measures in order to counter the present severe tensions which have erupted in Europe.”

Trichet has long urged euro zone governments to cut budget deficits to stop debt piling up. The failure of the Greek government to take this advice led to a debt crisis that risked spreading to other euro zone countries with similar problems.

“There need to be major improvements to prevent bad behaviour, to ensure effective implementation of the recommendations made by ‘peers’ and to ensure real and effective sanctions in case of breaches.”

In Zagreb, EU Economic and Monetary Affairs Commissioner Olli Rehn said bailouts had to be harsh to avoid encouraging reckless behaviour by governments.

“This mechanism must be made so unattractive that no leader of any (EU) country is voluntarily tempted to resort to this system,” Rehn said in a speech.  Full story

Exactly, we could not have said it better; if any help is offered (we are against this, but if the measures implemented are harsh enough it might just work) the restrictions should be so painful that it will make others think twice before breaking the rules. So far, all we have is talk; let’s see if it turns into action.

Now the head of European central bank finally agrees with what we have been saying all along. As we have stated before when bankers make comments that actually make sense one should pay heed to them. We feel that only a severe lesson will be sufficient enough to trigger the other laggards into finally pushing in long term meaningful measures to balance their budgets. Until then they will nod yes but in terms of actions nothing will change; it will be the business as usual.

The Euro has already hit one of our targets; when it was trading at or close to new highs we stated that it would trade down to the 120 ranges before putting in a bottom. However, the picture has changed slightly, and it now appears that the Euro could potentially trade down to the 115 ranges. We recommended shorting the Euro Via Euo several times, but at this point in the game, we think it’s a bit late to open up new positions, unless the Euro mounts a strong rally over the next few weeks.

Disclosure

We have positions in EUO

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