European Leaders Look for a Crisis Plan
The United States is trying for a second time. On Wednesday, the Senate once again endorsed a $700 billion plan to prop up America's finance system. The House of Representatives, which rejected an initial iteration of the package on Monday, may cast their ballots as early as Friday.
Now, though, with the effects of the growing finance crisis having leapt across the Atlantic, many in Europe are openly wondering whether the European Union needs to put together a bailout package of its own. French Finance Minister Christine Lagarde told the German business daily Handelsblatt on Thursday that the idea of a "safety net" will be raised at an emergency EU summit meeting called for Saturday in Paris.
"What happens if a smaller EU member state faces a looming bank collapse? It could be that this country doesn’t have the necessary funds to save the institution," she said in the interview. "In such a case, the entire EU finance system could be damaged."
The Organization for Economic Cooperation and Development (OECD) is also in favor of a massive bailout plan. "Considering the exposure of European financial institutions, we might have to start thinking of a systemic plan for Europe if things don't improve on the other side of the Atlantic," Angel Gurria, OECD secretary-general, told EU lawmakers on Wednesday.
The idea, though, is not a universally popular one. German Chancellor Angela Merkel, in an interview with the tabloid Bild, said on Thursday that "the federal government is unwilling and unable to hand over a blank check to all banks." Her comment echoed similar statements made by the German Finance Ministry on Wednesday. "The idea of applying one solution, one big bang…is not practicable and would create new, enormous problems," ministry spokesman Torsten Albig said at a press conference in Berlin.
A number of European leaders also spent Wednesday denying rumors that the EU was considering a €300 billion ($423 billion) bailout package on the model of the US Paulson Plan—an idea that has been attributed to France.
Still, European Commission President Jose Manuel Barroso asked the EU "for closer cooperation" to improve confidence in European markets. According to Luxembourg Prime Minister Jean-Claude Juncker, finance ministers from Germany, France, Britain and Italy would be at the Saturday summit along with European Central Bank head Jean-Claude Trichet. Juncker himself said on Wednesday that he didn't think Europe needed a US-style bailout plan.
So far, European countries have dealt with wobbling banks on a strictly domestic basis. Last week, the German government guaranteed billions of euros worth of bad debts belonging to the mortgage bank Hypo Real Estate. British Prime Minister Gordon Brown likewise moved quickly to prop up Bradford & Bingley. Similar moves have been made in the Benelux states, Ireland and Iceland among others.
But there is growing concern that the finance crisis could continue to widen here, particularly if the House of Representatives in Washington D.C. once again reject the bailout package. Indeed, even as the European Central Bank (ECB) continues to inject liquidity into money markets, European banks are turning around to park that money at the ECB, even as they lose money by doing so.
On Tuesday night, European banks had a total of €102.8 billion ($144.4 billion) deposited with the ECB, despite the interest rate being a below-market 3.25 percent. It was more than double the amount left with the ECB on Monday night and vastly more than the €1.4 billion banks deposited at the ECB as recently as Sept. 23.
The behavior indicates just how great mistrust currently is between banks. Financial institutions seem content to earn a low interest rate—lower even than the 4.8 percent they pay the ECB to borrow money—instead of loaning that money to other banks. "If you didn't have the economic turmoil in the back of your mind, you would think this is an uneconomic decision," an unnamed ECB official told euobserver.com, an independent news Web site in Brussels.
In Germany, leading Social Democratic politician Peter Struck attacked Deutsche Bank head Josef Ackermann after the banker on Wednesday voiced his support for a large bailout plan.
"As long as the banks were making profits, Mr. Ackermann was louder than anyone in saying the state should stay out of it," Struck said on Thursday. "It is odd that he should be the first to call for large-scale help from taxpayer money."