One troubling aspect of the banking crisis was that European banks, like their US peers, are at risk of failure, and some of them are sufficiently large that they are beyond the capacity of any one country to save. While Fortis was bailed out by three countries, ad hoc arrangements are risky. As Keynes said, “There’s many a slip ‘tween the cup and the lip,” yet another Lehman-scale failure could push the financial system into complete breakdown.
The Financial Times reports that the German government, in a reversal of their previous stance to have each government responsible for its own banks, has now reversed its position and is working on developing a plan for bank rescues. The FT article says the Germans will provide for equity injections into their own banks, parallel to the British plan announced last week. It suggests that Germans may also be relenting on joint action to save European banks (heretofore, the German stance was that each country was responsible for its own bank). Note that the plan details are still in flux.
If a new plan goes far enough, it would be very welcome news. Most observers regarded the G7 statement on Friday as empty and worried that concrete action was needed before the end of the weekend.
From the Financial Times:
The German government was last night drawing up a multi-billion euro contingency plan to shore up its banking system, which could see the state guarantee interbank lending in the country and inject capital in its largest banks.
The contingency draft, closely modelled on the British initiative announced this week, marks a dramatic political U-turn for Europe’s largest economy after Angela Merkel, chancellor, and Peer Steinbrück, finance minister, both ruled out a sector-wide state rescue for banks this week.
A senior government official said Ms Merkel and Mr Steinbrück would decide on Sunday which of the measures to implement after consultation with their European partners. Once a political decision was made, he said, the plan could be implemented in the following days.
“We are considering all the options at present to the exception of a massive state acquisition of toxic assets,” the official said. “Whatever we do will be done in close co-operation with our G7 and European partners.”
France announced last night that it was planning an emergency European Union summit tomorrow.
Speaking in Washington ahead of a meeting of Group of Seven finance ministers, Mr Steinbrück said the time had now come for “a systemic solution . . . I am convinced that case-by-case solutions are no longer helping. They are now exhausted.”
The official said Ms Merkel was in daily contact with Nicolas Sarkozy, French president, suggesting that the plan, if approved, could be launched as a joint initiative.
Ulrich Wilhelm, the government spokesman, said: “It is the duty of the federal government to be prepared and to review all options . . . As of now, no political decision has been made.”
Under the draft, Germany could issue a state guarantee for interbank lending worth more than €100bn and provide direct lending to the banking sector. Berlin is also contemplating offering several dozen billion euros of capital to the banks in exchange for equity and may take entire ownership of some institutions.
As an additional option, the government is considering extending the blanket guarantee it issued last Sunday for account deposits to money market funds, which have experienced a steep outflow of savings lately. Fund managers have had to divest considerable quantities of assets to cover the withdrawals.
Bankers said the interbank lending market in Germany had reached near-gridlock.
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How much of the problem has spread from these banks?
Seems the CP market is only declining due to bank CP.
It not only has to work, it has to change the perception of a few billion freaked out investors. Plus, there has to be follow on with even more, because a one-timer is not going to stop this avalanche. A valiant effort is being made by all, but this is a month late and a gazillion short.
MMMMMMMM…me love the smell of death in the fall air….your FAIL is not impress me.
Applauding Germany’s falling into step with Paulson et al is a serious mistake. I admit that we are in for a rough time but we will survive. What is important is to understand the larger geo-political chess game being played out here.
Paulson is the point man for banksters who have been managing financial panics for 2 centuries. The current crisis is a little bigger than their previous successes but the process is the same – Use Panic to consolidate power.
Thank goodness for those stubborn Germans. They are the only ones who are strong enough to oppose the Empire.
For an analysis of the “… all-out war going on between the United States and the EU to define the future face of European banking.” please read the story below.
http://marketoracle.co.uk/Article6704.html
Anon of 7:22 PM,
With all due respect, you are misreading the seriousness of what is happening. International trade is seizing up because banks are not honoring each others’ letters of credit. This is Smoot-Hawley on a vastly faster timetable.
I have been a huge Paulson basher long before it was popular, but to let politics stand in the way of stemming a collapse of international finance, and international trade along with it, is a BADLY misguided set of priorities.
Comrade Smith *,
In many ways, this global credit bailout is looking more and more like currency intervention or re-pegging related to currency reserves, but I don’t know anything about these things, so I’m relying on you to shoot holes into my crazy wild west theory — which thus far is just this sentence. I would add that $65 Trillion in derivatives might make a difference of some kind, but dahhh…
* I’m also open to pot shots from anyone else in this saloon (as well).
Well, that didn't take long, I'm back from shopping at Nakedcapitulation and found this to begin theory expansion>>>> I guess what I'm wondering is, is this mess creating a sort of Bretton Woods/ Plaza Accord of 1985 on-the-fly??
FYI: From the Financial Times:
The US, Europe and Japan discussed the possibility of co-ordinated currency intervention to support the dollar during the Bear Stearns crisis in March, according to Japan's Nikkei online.
The US Treasury declined to comment on the report, which claimed the G7 had considered issuing an emergency communiqué during the weekend of March 15-16.
The Financial Times was unable independently to verify the Nikkei report. A G7 official said he understood there were some preparations for possible currency intervention during that period, but did not comment on any international talks.
THURSDAY, AUGUST 28, 2008
Nikkei: EU, Japan, US Discussed Coordinated Intervention to Support Dollar
http://www.nakedcapitalism.com/2008/08/nikkei-eu-japan-us-discussed.html
Anon of 7:22 PM,
This begs the questiion?
What is the choice, give in to those that hold you at gun point or give in to those who hold you at risk of weakening the gun.
I don’t think what is occurring can ultimately be described as “an all out battle between the US and Europe over the future shape of banking”.
Surely the endgame structures need to include the Chinese in a major and central way.
They are the ones, after all, with the cold hard cash.
And they are brilliant negotiators, negotiating along the lines of “What’s mine is mine and what’s yours is negotiable”.
And we are a LONG way from the endgame. This is just the end of the first phase, when the credit catastrophe BEGINS to affect the real economy.
There is MUCH more to come.
Everything is ad hoc until the Chinese are on board. They have veto power.
Is this why Paul Volcker is in Asia now?
Matt
I flat disbelieve the FT report. It’s unsourced and probably push media.
The FT (and British press in general) does not hew to the US convention of saying “according to several sources” or “according to a source”. And I am told that the art of spin is not practiced as actively on the other side of the pond as here.
Their source may be wrong, or a fluid situation may decay, but I’d take the FT any day, hands down, over any US MSM outlet.
Well, well, wadda yah know; the Deutsch are finally passing through customs at the landing gate of the airport of reality. The idea that they could go it alone is piffle. Their economy is integrated; their currency is integrated; their _banks_ are integrated in how they operate. Their regulatory structure is fragmented, and their fiscs are segregated, but a crisis sinks ALL on board. Sovereignty is a thing of the past in the EU. Germany can either pull on the oars along with the rest or go down with them; sensibly they are reaching for the oars. What the Germans should do is to make damn sure that _they_ set HARD conditions for the restructure of finance in the EU immediately after the crisis peak. Like hard caps on profligate spending without revenue in member states, and a tight, common regulatory framework. You’ve got to pay, kamerade, but power is lying on the table so collect your winnings for your chips.
This crisis is harsh; the hopes and dreams of many are trapped below decks and aren’t going to make it. But what I _like_ about it is how quickly self-serving socio-political illusions are colliding nose first with the cold hard surface of The Way Things Really Are.
I’m not seeing in the FT article the suggestion for a change in policy from the current nation-to-nation solution to a EU-level solution. The closest it comes is the quote about: “a systemic solution . . . I am convinced that case-by-case solutions are no longer helping. They are now exhausted”. But the system he is discussing is either the German system or at the limit the global system. That is reinforced by the next statement about coordinating action with France. That tells me the plan is still government-to-government in Europe, with the governments themselves closely coordinating, but not at the EU level. What this means is that funds for say an Italian bailout will still come from Italy, etc. I have heard nothing that suggests an EU-level fund that would effectively transfer money from the countries with a successful economic history to those countries with less stellar economic traditions in Europe.
In other words each country is still responsible for its own banks, the only change is that the individual nations will coordinate more closely their policies and solutions.
Let’s wait and see, maybe I am missing something, but in my mind the EU would insist on radical changes to the political architecture of Europe before taking on a job similar to the US Treasury. And Germany and France would insist on safeguards against a majority of the nations of the periphery voting to fire up the printing presses. As it stands there is an insufficient amount of political legitimacy on the EU level and so it is not yet ready to take the politically difficult decisions of choosing winners and losers among European banks; let alone ot order on the EU-level the transfer of funds from say Germany to Italy. Any such move today would put the entire EU project in danger. While most rational people would agree that ideally the EU would possess the institutions capable of making these decisions; it will take a lot of work after the current crisis is resolved to bring those fundamental changes to reality.
Matt Dubuque
When you quote someone just cut and paste. Then you won’t leave any words out.
I said
“… all-out war going on between the United States and the EU to define the future face of __European__ banking.”
Of course this is not the endgame. This is a move on Europe. China comes later.
If we allow fear to dissuade us. If we worry about the millions who will suffer – and millions _will_ suffer terribly – then next time you will have to worry about tens or hundreds of suffering millions.
As a Euro I say let’s sink the Yanks. This debacle is US made. Kick them out of NATO. Put up an Atlantic barrier. Make friends with the Russians and the Arabs and dump the dollar.
A unified Europe.
See what does come out of the Euro-zone 15 meeting in Paris today. It is covered quite widely in the French and German papers this morning with an outline of what to expect.
Yesterday’s opening of the De Gaulle memorial at Colombey-les-Deux-Eglises featured “sozial markt wirtschaft” language from both Sarkozy and Merkel. There is a need to shape markets to serve people and not be destructive is a formulation among the reports. Markel is quoted widely with an adaption of an old French saying “chacun ses onions” to “chacun sa merde” which I guess means “everyone clean up their own mess.”
It might be that “clean-up” and “way forward” can be treated under different headings of discussion.
Brown was invited to a pre-meeting with Sarkozy, Trichet and the EC commissioner to lay out his plan. I don’t think Brown will be attending the Eurozone-15 meeting because UK isn’t in it.
There will be reports on this over the late morning and early afternoon I think. French and German governments look like they will be implementing tomorrow.
I think this is something which has been prepared over a longer time, and it will be worth paying attention to the words used to present what is proposed as well as what ever the proposals are as a practical matter.
I’m a Euro too. The Yanks are expensive, violent, and atavistic. They’ve pushed the entire world back into the 19th c., but armed with radioactive weapons and toxic securities.
It is financial war Yves. You act as though the Paulson plan is a solution when it’s actually a means to create a US banking oligarchy. These emergency conditions are totally manufactured. A simple proof: Look at how quiet the weekend is compared to the weekly rollercoaster from hell. Having lived through a few myself, I can tell you that a real storm doesn’t take weekend breathers.
States ultimately dominate the banks and seek to dominate each other. This is a crisis of sovereignty not merely profit.
Post asset devaluation the US intends to use its trillions in “bailout” money to buy up cheap assets then flood the world with liquidity to devalue its debt. The “bailouts” will weaken the dollar and wreck international trade by design. They’ve led the world into chaos and plan more chaos to gain ground. Isn’t it obvious that stability is not the US government’s interest?
It is naive to think that the US wants to save the world economic system when it is clearly interested in saving only its own banking elite.
No finagling at the top alone will restore the American economy. 75 percent of the economy is driven by the spending of ordinary consumers and they are frightened. Call it PTS and it will not be cured easily. The distribution of free booze and Prozac will jerk start spending again. That is the only quick fix that is possible.