The Next Phase of Euro Bailout: Market Volatility from Broken Promises

I have been saying that financial markets have been riding partly based on the promises of European political leaders that have been meant to be broken. Now the breaking down of such pledges begins

From Bloomberg (bold emphasis mine)

Europe’s options for overcoming the debt crisis narrowed as Germany doused expectations of a breakthrough at this weekend’s summit and central bankers balked at extended bond purchases.

European stocks and the euro reversed initial gains yesterday, slumping after German Chancellor Angela Merkel’s office knocked down what it called “dreams” that the Oct. 23 summit will be the last word in taming the crisis. Christian Noyer, head of France’s central bank, ruled out a ramping up of the European Central Bank’s bond-buying program as part of a multi-pronged strategy to shield countries like Italy.

While Group of 20 finance ministers and central bankers pressed European Union leaders to set out a strategy by the end of the week, divisions flared over an emerging plan to avoid a Greek default, bolster banks and curb contagion.

“We’re really in a bind here,” Carl Weinberg, founder and chief economist at High Frequency Economics, said in an interview with Betty Liu on Bloomberg Television’s “In the Loop.” “We have a lot of egos, a lot of national interests, a lot of political considerations, and that’s just hampering us from getting to a solution.”

The ECB said yesterday it bought 2.2 billion euros ($3 billion) of bonds last week, the least since it restarted the market support program in August over the objections of Germans on its council. While looking to exit the bond-buying business, the ECB also opposes the use of its balance sheet to boost the government-financed 440 billion-euro rescue fund with enough firepower to do that job…

Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Seibert told reporters in Berlin. The search for an end to the crisis “surely extends well into next year.”

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging crisis plan. Providing a week to act, they set the Oct. 23 meeting of European leaders as the deadline.

My guess is that the recent market rebound may have given Euro’s political leaders some confidence to back off from their earlier assurances, AND OR that the reality of the heterogeneity and complexity of the underlying problems has been rendering their ‘grandiose’ centralized plans for a ‘comprehensive’ rescue as untenable.

Importantly the October 23 deadline by the G-20 on Euro policy makers will likely amplify current volatility.

Telegraphing reluctance to inject more ‘money from thin air’ means that turbulent times are not over.