Merryn's Blog

Why the bail-out rally might be short-lived

Markets are up after the eurozone rescue package was announced. But if the reaction to the US subprime bail-out is anything to go by, the rally won't last very long at all.

"Markets rocket on bailout package"... "FTSE 100 closes up 8.84% - biggest one-day gain ever"... No, these aren't today's headlines. They're dated 19 September 2008, just after the US government came up with a $700bn scheme to bail out the country's banks after the subprime mortgage meltdown.

And clearly, the markets liked what they saw for about 24 hours. But what happened next? Here's how the FTSE 100 then reacted:

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.
10-05-10-bailout

That huge one-day surge was followed by an even bigger dive. Within six months, the index had plunged by over a third. Investors clocked that the bail-out package wouldn't solve underlying problems.

It took an even larger $1 trillion rescue plan in March 2009 to restore investors' confidence in shares. Eventually, the Americans threw so much money at the markets that asset prices had to recover. But even now, the FTSE 100 has only just regained its September 2008 levels.

Advertisement
Advertisement - Article continues below

So what will happen this time?

The latest €750bn European Central Bank (ECB) package is a straight swap. Instead of US subprime lenders being funded by the Fed, this time it's the PIIGS (Portugal, Ireland, Italy, Greece, Spain) that are being bailed out by the ECB.

Clearly, today has seen a big burst of short-term relief in the markets. What's more, a lot of 'short' positions, where traders have sold in the hope of buying back lower down, are being closed out. That has squeezed prices higher.

But further out, will being bailed make Greece more likely to cut back its borrowings? Somehow I don't think so. As Wolfgang Munchau says in the FT, "the time will come when throwing money at problems without structural change will cease to work, and even to impress".

Quite. And when investors rethink, they may well decide they're not at all convinced about this latest bail-out. Just as in September 2008.

Advertisement

Most Popular

Visit/economy/inflation/600799/federal-reserve-inflation-money-printing
Inflation

Here’s why the Federal Reserve might print more money before 2020 is out

The Federal Reserve wants to allow US inflation to run “hot” for a while. But that’s just an excuse to keep interest rates low – and possibly print mo…
10 Feb 2020
Visit/investments/property/house-prices/600795/uk-house-price-rise-brexit-bounce
House prices

Is the jump in house prices just a Brexit bounce, or is it more durable?

UK house prices rose sharply in January. Some of that is down to the end of Brexit uncertainty – but not all. There is a real risk that prices will ke…
7 Feb 2020
Visit/economy/uk-economy/brexit/600778/winners-and-losers-from-a-hard-brexit
Brexit

Winners and losers from a hard Brexit

Our exit from the EU is likely to be of the hard variety, says Matthew Lynn. Investors should back the industries that will flourish
9 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020