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Shaky banks burst European bubble
European politicians are discovering what cometh after pride. A week after lambasting the US for allowing its banks to run out of money and after resisting calls to set up their own rescue mechanisms, leaders across Europe on Monday bailed out banks from Belgium, Germany and the UK.
- By Simon Kennedy, Bloomberg News
- Published: 00:02 October 1, 2008
European politicians are discovering what cometh after pride. A week after lambasting the US for allowing its banks to run out of money and after resisting calls to set up their own rescue mechanisms, leaders across Europe on Monday bailed out banks from Belgium, Germany and the UK. Dexia received aid from France and Belgium, while Ireland's government said it would guarantee bank deposits and debt for two years.
German Chancellor Angela Merkel and UK Prime Minister Gordon Brown may be forced to advocate a comprehensive approach of the kind US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are urging Congress to pass.
The two Americans turned to a broad package after early attempts to deal with each financial-institution crisis individually didn't work.
"The gods of the markets are punishing those who showed hubris," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. "Europe has been bashing the US, but it's realising now it has its own problems."
"The Americans have no choice. We must have a comprehensive solution," European Central Bank council member Christian Noyer said on RTL radio today. "I'm counting on a solution coming very soon."
On Monday, the British Treasury seized Bradford & Bingley, the UK's biggest lender to landlords, hours after the Netherlands, Belgium and Luxembourg agreed to inject 11.2 billion euros ($16.1 billion) into Fortis, Belgium's biggest financial-services firm, in return for minority stakes.
Germany guaranteed a 35 billion-euro loan to property lender Hypo Real Estate Holding .
Investors will dump shares of the continent's banks and keep borrowing costs elevated if leaders don't coordinate a solution, Lena Komileva, an econ-omist at Tullett Prebon, the second-biggest broker of transactions between banks, said.
Clear message
"The US experience should send a clear message to Europe that you need a contingency plan," said Komileva. "The fact there still isn't one will focus investors on the vulnerability of Europe's economy and financial system."
French President Nicolas Sarkozy pledged on Monday to support that country's banks, paving the way for the 6.4 billion euro state-backed rescue for Dexia, the world's biggest lender to local governments. He urged politicians and ECB officials to meet next week and conferred yesterday with executives from France's largest banks and insurers. Peer Steinbrueck, Merkel's finance minister, yesterday called his country's package "the biggest bank bailout in German history".
When Paulson asked European leaders on September 21 to "do similar things" as he was with the bailout package, the response wasn't enthusiastic.
'Fixation on returns'
Steinbrueck said the US would lose its status as the "superpower of the global financial system" and that the "Anglo-Saxon" model of banking had "an exaggerated fixation on returns".
Sarkozy decried the "mad system" that sparked the meltdown in New York on September 23.
"The European rhetoric is backfiring as its own banking system comes under pressure," said Marco Annunziata, chief economist at Unicredit MIB in London.
Europe's leaders may have been foolhardy to think their banks would avoid the fallout. Of the $591 billion in losses and writedowns recorded by global banks since the start of 2007, 39 per cent are accounted for by European lenders.
At the same time, economists at Citigroup said in a report that European banks, with lower profits and interest margins than those in the US, have "less cushion to absorb financial strains and losses".
In theory, the 27-nation EU should be a means of coordinating policy. But reaching a European consensus requires agreement among 27 capitals, many juggling their own political imperatives.
The European Commission will unveil legislation aimed at strengthening bank monitoring. It may let national authorities set capital requirements for their lenders operating in multiple countries.
So far, though, governments have agreed only to knit supervision closer together by 2012 and pledged to cooperate in managing a crisis. They have also resisted devising a formula for splitting the bill in the event of a cross-border bailout.
"We have been for a long number of years trying to get some kind of European supervisory authority for those institutions that have cross-border reach," EU Financial Services Commissioner Charlie McCreevy said. "It is particularly difficult to get agreement among members who want to preserve control of supervision."
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