European politicians are discovering what cometh after pride.
A week after lambasting the US for allowing its banks to run out of money and after resisting calls to set up their own rescue mechanisms, leaders across Europe yesterday bailed out banks from Belgium, Germany and the UK Dexia SA today received aid from France and Belgium, while Ireland's government said it would guarantee bank deposits and debt for two years.
German Chancellor Angela Merkel and UK Prime Minister Gordon Brown may be forced to advocate a comprehensive approach of the kind US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S Bernanke are urging Congress to pass. The two Americans turned to a broad package after early attempts to deal with each financial-institution crisis individually didn't work.
“The gods of the markets are punishing those who showed hubris,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co in New York. “Europe has been bashing the US, but it's realising now it has its own problems.”
Paulson encountered difficulties yesterday when the House of Representatives voted down the $700-billion plan by a 228 to 205 margin. The failure to pass the legislation sent the Standard & Poor's 500 Index to its biggest decline since the 1987 crash. Paulson said he will work with Congress to salvage the proposal. Lawmakers may take up the measure again this week, House Majority Leader Steny Hoyer said.
‘No Choice’: “The Americans have no choice. We must have a comprehensive solution,” European Central Bank council member Christian Noyer said on RTL radio today. “I'm counting on a solution coming very soon.”
Yesterday, the British Treasury seized Bradford & Bingley Plc, the UK’s biggest lender to landlords, hours after the Netherlands, Belgium and Luxembourg agreed to inject ¤11.2 billion ($16.1 billion) into Fortis, Belgium's biggest financial-services firm, in return for minority stakes. Germany guaranteed a ¤35 billion loan to property lender Hypo Real Estate Holding AG.
Investors will dump shares of the continent's banks and keep borrowing costs elevated if leaders don't coordinate a solution, Lena Komileva, an economist at Tullett Prebon Plc, the second-biggest broker of transactions between banks, said in London.
‘Clear Message’: “The US experience should send a clear message to Europe that you need a contingency plan,” said Komileva. “The fact there still isn't one will focus investors on the vulnerability of Europe's economy and financial system.”
French President Nicolas Sarkozy pledged on
Monday to support that country's banks, paving the way for the ¤6.4 billion state-backed rescue for Dexia, the world's biggest lender to local governments. He met today with executives from banks and insurers and said he will announce measures next week to address the crisis. Peer Steinbrueck, Merkel's finance minister, yesterday called his country's package “the biggest bank bailout in German history.”
When Paulson asked European leaders on Sept 21 to “do similar things” as he was with the bailout package, the response wasn't enthusiastic.
Steinbrueck said the US would lose its status as the “superpower of the global financial system” and that the “Anglo-Saxon” model of banking had “an exaggerated fixation on returns.” Sarkozy decried the “mad system” that sparked the meltdown in New York on Sept 23. And UK Chancellor of the Exchequer Alistair Darling said the situation required “not a knee-jerk reaction, but a measured response.”
Rhetoric ‘Backfiring’: “The European rhetoric is backfiring as its own banking system comes under pressure,” said Marco Annunziata, chief economist at Unicredit MIB in London.
Last on Tuesday, Brown told reporters “we will continue to take whatever steps are necessary” to ensure financial stability.
Europe's leaders may have been foolhardy to think their banks would avoid the fallout. Of the $591 billion in losses and writedowns recorded by global banks since the start of 2007, 39 per cent are accounted for by European institutions.
At the same time, economists at Citigroup Inc said in a report on Tuesday that European banks, with lower profits and interest margins than those in the US, have “less cushion to absorb financial strains and losses.”
National Needs: In theory, the 27-nation EU should be a means of coordinating policy. The bloc has unified laws on trade and labour standards. But reaching a consensus requires agreement among 27 capitals, many juggling their own political needs.
Budget deficits also limit Europe's firepower. Barclays Capital estimates that of the large economies, only Germany, the biggest, has the fiscal room to finance a US-like plan.
The European Commission, the EU's executive body, will unveil legislation this week aimed at strengthening bank monitoring across borders. It may let national authorities set capital requirements for their lenders operating in multiple countries, according to a draft obtained by Bloomberg News.
So far, though, governments have agreed only to knit supervision closer together by 2012 and pledged to cooperate in managing a crisis. They have also resisted devising a formula for splitting the bill should a cross-border bailout become necessary.
Cross-Border Reach: “We have been for a long number of years trying to get some kind of European supervisory authority for those institutions that have cross-border reach,” EU Financial Services Commissioner Charlie McCreevy said on Tuesday in Dublin. “It is particularly difficult to get agreement among member states who want to preserve control of supervision.”
The ECB, which oversees monetary policy in the 15 nations sharing the euro, gives Europe one way of acting multilaterally. It joined the Fed, the Bank of England and other counterparts yesterday in injecting another $630 billion into the global financial system through currency swaps.
Politically, some European officials maintain they are equipped to deal with the crises. Dutch central bank governor Nout Wellink said in an interview yesterday that Fortis's rescue shows “that cross-border issues can be solved by respective governments.”
Still, Greg Fuzesi, an economist at JPMorgan Chase & Co in London, noted that Dutch and Belgian authorities already had a support agreement in place, making Fortis “a special case.” It remains “less clear whether European policy makers could agree and implement a system-wide fiscal package,” he told clients.
Bank Liabilities: Ireland's decision to protect liabilities of about ¤400 billion for two years may be followed by other countries, economists said.
Daniel Gros, director of the Centre for European Policy Studies in Brussels, says European governments ultimately will have to put capital into their banks, which he calculates are more leveraged than their US rivals.
“These are highly leveraged institutions which need to have support from the public purse,” said Gros. He suggested that governments assign the European Investment Bank, the EU's financing arm, with the job of infusing ¤250 billion to support the region's banks, in return for an equity stake.
