Emergency G8 summit as crisis deteriorates
The latest news is France is seeking a G8 emergency summit as governments and central banks are losing control of the financial crisis, which yesterday continued to deteriorate. MarketWatch has been picking up news from Nikkei of Japan that the G7 finance ministers and central banks are considering an emergency meeting in Washington as early as this Friday. There also reports from Reuters, aka Calculated Risk, that the Federal Reserve is now planning directly to intervene in the commercial paper market by means of special purpose vehicle to ensure a continue flow of funds to corporates.
Yesterday, and overnight, saw a series of dramatic market moves. The euro has fallen below $1.35, the Dow Jones fell below 10000, and in Europe stock markets were down some 7-9%. Overnight, the rout continued in Asia, where the Nikkei also fell below 10,000 despite huge liquidity injections by the Japanese central bank. Asian stocks later recovered. And oil was down below $90bp.
Eurogroup agrees guidelines for bank rescues
Last night’s eurogroup meeting already took a decision to establish broad guidelines for banking rescues. Don’t hold your breath, this is not a European rescue plan. Under those guidelines, governments should only rescue systemically important banks – though it is up to governments themselves what that means. The guidelines also suggest that the taxpayers’ interest should take precedence over the shareholders’.
Ecofin meeting starts today, and it is going to be a lively debate. The reception of the Irish Finance minister Lenihan at the Eurogroup was said to have been less than cordial, although European Central Bank Jean-Claude Trichet is believed to have been supportive of the Irish stance, reports the Irish Independent. Lenihan apparently tried to argue his way out by saying: look, other countries have done the same as we did (what a surprise!).
At the meeting today EU finance ministers are expected to agree at a meeting that every country puts a state guarantee on all deposits up to €100,000. The prospects of the establishment of a European Union-wide rescue fund for the banking system are pretty slim. Here is a chart by Le Monde about deposit insurance in the EU
Did Merkel and Steinbruck lie about deposit insurance and the HRE bailout?
The German government, after all, plans no law to guarantee bank deposits. These were apparently just warm words from Angela Merkel, intended to calm the situation. The finance ministry also apparently raised the government’s guarantee for Hypo Real Estate from a previous €26bn to €35bn, while simultaneously trying to mislead the public that this was not the case. FT Deutschland is this morning full of horror stories of German government incompetence. Interesting also is Peer Steinbruck’s explanation why he is opposed to a European solution. He does not want to be dependent on a bureaucracy and procedures over which he has no influence. So this is what we have always assumed it would be. Just a personal power play.
Irresponsible Germans
Le Monde editorial had a go on Germany and its incomprehensible refusal of a European response to the crisis at the mini summit on Saturday only to announce on Sunday an unlimited guarantee on German deposits. Germany is a world player that does not assume its responsibilities. The bankruptcy of Hypo Real Estate is a sign that the German banking system is its weakness with consequences for the entire financial system of the old Continent. Yes, the Grand coalition is difficult and the French were not always attentive to German complexity nor to Angela Merkel’s way to play things down. But this is no excuse for Germany’s refusal to engage in a European response in the logic of the 1990’s, when Germany was not willing to pay for Europe and more subsidiarity. As if there is not the worst financial crisis since the 1980’s!
Headless Europeans
The Austrian newspaper Der Standard has a ferocious article accusing the Europeans of inciting the financial crisis through irresponsible behaviour that oscillates between helplessness and panic. There is no master plan, only hot air. Instead countries act like maniacs following each other in giving out costly deposit guarantees. Why is a guarantee necessary when the underlying assumption is that the banks are stable? The current inability in Europe to act together is without example and this in times where the welfare of the Europeans is on the line.
The dangers to the monetary union
Edward Hugh, writing in a Fistful of Euros, has a thoughtful article about the risks for the eurozone. He has done the math. In Germany, Hypo Real Estate alone will require funds of €50bn by the end of this year, followed by another €100bn in 2009. In Spain alone, he calculates, banks will need between €300bn and €500bn. He says the situation in Italy is also very serious, and concludes that the euro area itself is at risk without a coherent strategy.
Crisis will accelerate European fiscal union
Avinash Persaud argues in Vox, that the liabilities of the biggest US bank equal half the US tax revenues; the ratios in Europe are bigger. Deutsche Bank’s liabilities are one and a half times Germany’s annual tax revenue; Barclays' are twice Britain’s. This crisis will either leave European financial integration in tatters or quicken the development of European fiscal capacity. European integration is a historical process that routinely stumbles upon crises that threaten to destroy it, only to find that it has been deepened by the crisis.
ECB’s policy error
Sebastian Dullien, writing in Eurozone Watch, argues that the ECB committed a serious policy error by raising interest rates three months ago, only to revert now. While the rate cuts are welcome, they are too late to have a serious impact. By raising rates at a time when the economy already headed towards recession the ECB not only damaged the economy, but it also damaged its own reputation.
Krugman’s multiplier
As we wrote yesterday, Paul Krugman pre-announced a paper on the international financial multiplier, a simple theoretical model of the crisis. We have not had a chance to look at it this morning. You can find it here.
The end of liberalism?
The financial crisis might become the pretext for French Socialists to redefine their economic agenda, writes Le Monde. Socialists who dream about the end of the anglo saxon inspired liberalism see their time coming. Ahead of the party congress in Novembre, Martine Aubry, former education minister and mayor of Lille, called for a complete renewal of the French economic system. A new battle within the Socialist party begins. In the current crisis the chances are not too bad for those to succeed.
France back and forth
Recent interventions of Nicolas Sarkozy’s staff show a divide between two camps, one that promotes a rigourous budget policy along the lines of the Stability and Growth Pact, and the other that advocates a deficit financed spending programme to relaunch domestic demand. Until now, Sarkozy preferred to remain ambiguous about his preferences but Le Monde warns that the ongoing economic deterioration might well force him to choose.
The credit squeeze reaches Germany’s Mittelstand
Here are the data of the latest Mittelstand survey of Creditreform, which show a modest, though not yet alarming, tightening in credit conditions. 2% of companies no longer receive credit, half enjoy unchanged conditions, while 30% have to struggle to get approval, and have to post more collateral. The biggest problems is faced by companies with a weak capital ratio, which is endemic in Germany’s SME sector. About a third of German companies have a capital ratio of 10% or less. See Frankfurter Allgemeine for more on this.
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