European governments pledged Monday to safeguard bank deposits in a bid to stem financial panic, but they stopped short of a coordinated strategy to break the grip of a credit crisis that now threatens to set off a protracted recession across the Continent, sending markets tumbling on both sides of the Atlantic.
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Europeans Handle Crisis Together and Separately
By Nelson D. Schwartz and Carter Dougherty
7 October 2008
European governments pledged Monday to safeguard bank deposits in a bid to stem financial panic, but they stopped short of a coordinated strategy to break the grip of a credit crisis that now threatens to set off a protracted recession across the Continent, sending markets tumbling on both sides of the Atlantic.
The lack of orchestration — despite pledges to the contrary from European Union officials Monday and a plea from the head of the International Monetary Fund to step forward with concrete plans — raised the prospect that the European Central Bank would need to help mop up the mess by cutting interest rates, a move hinted at by the ECB’s president, Jean-Claude Trichet, last week.
“We’ve seen both at the national level and more importantly at the international level, that there’s no strategy,” said Richard Portes of the Center for Economic Policy Research in London. “It reflects the underlying fact that individual governments don’t have a clear sense of where to go,” he added.
The crisis that began in the United States has rapidly spun out of control in Europe, with television footage of ministers rushing to bail out some of the largest banks and a succession of meetings in Paris over the weekend feeding a climate of fear that has dried up the flow of credit just as some economies head for recession.
With European stocks being hammered -- the FTSE index of British stocks down 7.9 percent, the DAX index of German stocks down 7.1 percent and the CAC index of French stocks down 9.0 percent — finance ministers gathered ahead of a meeting in Luxembourg on Tuesday to address the crisis and discuss sharply increasing the level of deposit insurance across all 27 European Union member states.
But other bold Europe-wide approaches to the crisis have not yet emerged. Earlier Monday, Germany ruled out contributing money to a pan-European effort, even as officials said they were considering a broad package to shield their the nation’s banks.
Meanwhile, authorities in Austria moved to match Germany’s decision on Sunday to guarantee bank deposits, and Spain pledged to follow suit if a single euro-zone policy is not found soon. Denmark went further, announcing it would also guarantee loans that banks make to one another overnight as banks continue to recoil from doing business among themselves.
Farther away, Iceland, one of the world’s hardest-hit countries from the credit turmoil, fell deeper into crisis as the government halted trading in all financial stocks after the banking sector neared collapse. The country suffered a fresh downgrade of its credit rating Monday after the government sought to grant itself sweeping new powers to intervene with troubled banks. Facing a cash squeeze as foreign investors bail out of the country, the government also beckoned its pension funds to repatriate money in an effort to reel in more cash.
That individual European governments continue to plot their own course in the crisis has not helped: Europe’s big cross-border banks find themselves trying to conserve capital and are cutting back on lending to local businesses.
In some cases, even loans within the same bank have been held up trying to cross borders because different units enjoy varying degrees of state backing, according to one top European banker spoke anonymously because of market sensitivities.
These bottlenecks have altered the thinking of analysts who thought the region might escape the worst, and raised pressure on the ECB to cut interest rates — perhaps the only significant euro-zone tool to ease the credit crisis that has yet to be deployed.
“The fear in Europe is that a recession may be a protracted one,” said Holger Schmieding, chief economist for Europe at Bank of America. “I hope we won’t go there, but the mood is dark.”
Schmieding now expects the economies of the United Kingdom, Germany and France — Europe’s largest — to contract in the fourth quarter of 2008. For 2009, he predicts growth of just 0.4 percent among the 15 nations that use the euro, less than half what he was predicting six weeks ago. “There’s a realization that the credit crunch has hit Europe with a lag of one year, and that’s turning into a serious constraint on the economy for the next six months,” he said.
At the same time, governments seem to have different priorities for cross-border institutions that need help, like Fortis, which had large operations in Belgium, Holland and Luxembourg.
While government and central bank officials in Brussels were eager to sell the Belgian units of Fortis to BNP Paribas of France, sealing a deal Monday, officials in Holland nationalized Fortis’s Dutch unit on Friday, keeping what had once been ABN Amro’s local retail branches in Dutch hands.
In London, the British government appeared to be moving closer to a partial nationalization of the industry to avoid falling behind other European countries that have moved ahead with their own strategies. Speaking to the House of Commons Monday, the chancellor of the Exchequer, Alistair Darling said the government “will do whatever it takes to ensure that we stabilize the banking system.”
“All practical options must remain open to us,” he added, but he gave no timetable for action.
Top European officials defended their case-by-case approach to easing the crisis at the national level in the absence of pan-European tools like a federal budget and single banking supervisor. They also implied that the American strategy, which included a rocky road to final approval of a $700 billion federal rescue package, was not foolproof.
“It strikes me that governments have lived up to their responsibilities,” Trichet said ahead of a meeting of European financial ministers in Luxembourg scheduled for Tuesday. “Who can say we did worse than on the other side of the Atlantic?”
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