Bailout fatigue takes hold

June 19, 2012

| MoneyRates.com Senior Financial Analyst, CFA

A meeting of leaders from the world's largest economies wrapped up this week with a unified pledge to act in support of the world's troubled economic and financial systems -- but no breakthrough strategy that offers a clear path out of these difficulties.

Representatives of the G-20 nations met in Los Cabos, Mexico amid concerns about slowing economic growth around the world and an immediate crisis surrounding some of Europe's debtor nations. G-20 representatives issued a statement saying they would "act together to strengthen recovery and address financial market tensions." The difficulty is that achieving those goals is much easier said than done.

Already, the central banks of Europe and the U.S. have taken extensive action to promote growth and shore up the financial system. Now, the International Monetary Fund is effectively passing the hat, securing billions of dollars in pledges of support from China, Brazil, India and Russia. Still, the world's markets seem unimpressed. Their skepticism reflects a number of issues:

  1. Inflated expectations are a sign of bailout fatigue. Already, extraordinary measures have been taken to stimulate an economic recovery and prevent a series of loan defaults. Signs are everywhere, including bailout packages for key U.S. industries, record-low mortgage rates and debt assistance deals for countries like Greece. Each solution has not only failed to solve the crisis, but is met by market expectations for bigger and more dramatic actions -- a sign that the world is suffering from bailout fatigue, having seen too many emergency measures to be impressed any longer.
  2. Bailouts are only temporary solutions. All of this is a reminder that bailouts are only a means of buying time. They can only help a company or a country regain its footing if there was a reasonably solid financial basis to begin with.
  3. The euro zone does not have a bottomless well of resources. The popular cry in recent weeks is that the rest of the euro zone, and Germany in particular, should spend more to help Greece, Spain and other debtor nations grow their way out of trouble. However, even Germany and the other rich nations have limited resources, and they have every right to be concerned that too much spending will simply drag them into the quicksand of debt.
  4. Bailouts may be rewarding irresponsibility. It's not just that debtor nations have borrowed irresponsibly -- those who bought their bonds made unsound investments. Bailouts don't just rescue nations; they help investors who made those bad choices. Until investors stop having their mistakes backstopped by government resources, there is no reason for the cycle of irresponsible borrowing and lending to end.

As the G-20 wrapped up its meeting, attention turned to the U.S. Federal Reserve, whose Open Market Committee was due to release a statement at the conclusion of its latest session. However, as much as the world keeps turning to its economic leaders for miracles, it seems unlikely the solution will be so easy.

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