And on the Seventh Day he rescued a bank
This weekend was a testimony to the fact that there is no coordinated response of the EU in this crisis. The mini summit in Paris brought nothing but warm words about common responsibility but countries - especially Germany and the UK - insisted on national solutions and dismissed any suggestions of the necessity for an EU fund.
Germany decided to follow last week’s move by the Irish government and to issue a complete guarantee on all deposits. Germany is the first large EU country to do so. Spiegel online speculates that Germany’s decision could trigger a common EU guarantee for deposits to escape this toxic beggar-thy neighbour policy.
The other event over the weekend was that Fortis, on Friday still a Belgian-Dutch bank, is now Belgio-French. The Belgian government was forced to find a buyer after the Dutch government broke free from their earlier agreement and nationalised its part of Fortis. The Dutch explanation was that the troubles are all in the Belgian part (more on Nisnews).
It is the French bank BNP Paribas that agreed now to hold 75% of Fortis, Belgium and Luxembourg in return will become principal shareholders of BNP, receiving 11.7% of its capital in new shares. Le Soir has more details concluding that the negotiated deal is so complicated that it is close to impossible to assess the impact. Le Figaro notes that this deal is set to make BNP the biggest bank in the eurozone by deposits.
In Germany, meanwhile, it emerged that Hypo Real Estate was a little economically with the truth when it asked for €35bn bridging loan. In fact, it needed €50bn. A new package was negotiated over the weekend, in one of those now customary crisis meeting that last shortly before the Asian market open, around midnight central-European time. Under this package there is a public-private sector loan, of which the German government underwrites €35bn. The FT writes that under the new deal the German government credit guarantee remains unchanged at €25.6bn. The gap was filled by an increase in the private sector share. The reason for bailing out HRE is its pivotal position in the market for Pfandbriefe, or covered bonds, which are high-quality bonds, backed by mortgages or local authorities, and where the issuing bank retains the risk on its balance sheet.
Rumors that Greece followed the Irish example were not confirmed by Kathemerini, which reported that finance minister Giorgos Alogoskoufis did not state anything about plans to guarantee deposits. They assured that the government does not intend to table a bill on the issue the way that the Republic of Ireland has done. Reports yesterday suggested that the government intends to ask the competent authorities in the European Union for an increase in the ceiling on guaranteed deposits under the Deposits Guarantee Fund (TEK) from €20000 to €30000.
Meanwhile, it was bailout-week in other parts of the world too. The FT reports that UK chancellor Alistair Darling was on Sunday considering a wide-spread recapitalisation of British banks, “some pretty big steps we would not take in ordinary times”. Britain’s opposition also favours a recapitalisation plan. In Iceland, pension funds were asked to repatriate foreign-held asssets, while the central bank was trying to bolster its foreign exchange reserves. The government was also in meeting with banks to discuss measure to ease the crisis, according to the Financial Times.
In Asia this morning, meanwhile, stock markets open some 3-4% lower.
And now for the comment:
Nicolas Barre in Les Echos deplores the fact that the European states are incapable to set up a supranational system even if faced with a crisis of the whole banking system. He writes that this inability is the principal weakness of Europe and that it might possibly become devastating for the euro itself.
Spiegel Online writes that instead of solving problems together, member states act against each other.
Wolfgang Munchau, in his column in the FT, also makes the point that there the case for a European bailout system is overwhelming for three reasons. First, some banks are too large to be saved by their national government. Second, there are significant spillovers from national policies. An example was Ireland’s blanket guarantee that was quickly followed by others. Third, this financial crisis has the potential to threaten the macroeconomic policy regime. Lack of a common financial and banking supervisory and political authority remains the weakest link of EMU to date. It is not clear whether the euro would survive a total collapse in the financial system, and it worth paying insurance against this calamity.
Paul Krugman is promising as what he calls a financial multiplier model, which operates through the balance sheets of highly leveraged financial institutions. “When these institutions lose heavily in one market — say, US mortgage-backed securities — they find themselves undercapitalized, and have to sell off assets across the board. This drives down prices, putting pressure on the balance sheets of other HLIs, and so on. And so a crisis originating in Florida condos and San Diego McMansions is causing havoc for Greek banks. Financial globalization, it turns out, means globalized financial crises.”
Willem Buiter focuses on the question of how to get the inter-banking market going again. The problem at the moment is that banks do not lend to each other for fear that the counterparty is not safe. He proposes three options: first, nationalise the banks, second, have the government guarantee inter-bank lending, both secured and unsecured, and finally have the central bank play the role as the universal counterparty for interbank transactions.
Brendan Keenan in the Irish Independent had a kook into the last Financial Stability report from the central bank to find any early warning of what is happening right now. The policy conclusions were complacent about the risks and totally misleading but the underlying problems were already identified by the report. It includes excessive credit growth, concentration in property-related lending, too much reliance on borrowings rather than deposits and capital, falling core profits, and too much borrowing in the money markets. Keenan now argues that the most outstanding figure - 85% of new bank lending to companies in 2007 related to commercial property – was what brought down the system. Government deposit guarantees won’t fix this. The process will be long and painful.
Reforming Italy’s social system
Tito Boeri writes in Lavoce that Italy needs some reform in its welfare system to take account of immigrants, which make up an increasing part of the country’s workforce, which explains the rise in unemployment by 300,000 from last year, after taking account of the rise in the workforce. It is important therefore to reform the social shock absorbers. The experience of Alitalia teaches us that one part of the workforce receives help, while the other is totally excluded from the system.
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.