Germany issued a blanket guarantee of all its consumer bank deposits on Sunday, as a group of European countries adopted emergency measures to shore up the Continent's financial system against the widening international credit crisis.
In tandem with its surprise move to protect deposits, the government of Germany, Europe's largest economy, arranged a bailout for Hypo Real Estate Holding AG, a giant property lender that came close to collapsing after private lenders pulled out of an earlier €35 billion ($48.2 billion) aid plan last week.
Also Sunday, the governments of Belgium and Luxembourg arranged a deal under which French lender BNP Paribas SA will take over the Belgian and Luxembourg operations of Fortis NV for roughly €15 billion in cash and stock. The deal for the Dutch-Belgian-Luxembourg insurance-and-banking giant came after a previous rescue plan last week failed to prevent an exodus of customers, and the Netherlands nationalized the Dutch wing of the company.
In Italy, meanwhile, the board of banking giant UniCredit announced that it would launch a €3 billion emergency capital increase. Sunday's meeting was a surprise; just days earlier, UniCredit's chief executive had gone on national television to say that the bank was solid.
But executives decided to call the meeting after the bank's stock was pummeled last week, as investors fretted about the credibility of the bank's reassurances and persistent worries over its cash levels. At one point UniCredit's stock reached a 10-year low before rebounding.
The patchwork of measures all came less than 24 hours after the leaders of Europe's four largest countries pledged after a meeting in Paris to protect their financial system. "We are taking a solemn commitment to back banking and financial institutions," French President Nicolas Sarkozy said at a news conference after Saturday's summit.
In the U.S., fed officials have taken aggressive actions in recent weeks to try to alleviate the severe pressures weighing on damaged short-term funding markets. New measures from the central bank are likely in the days ahead. It is not yet clear exactly what steps the Fed will take, but it could be aimed at commercial-paper markets, which have been damaged by skittishness among money-market funds, a big investor in this asset class.
The crisis in Europe now has broadened from the implosion of U.S. mortgage-related assets to a mounting unwillingness among European banks to lend to one another and a growing loss of confidence among investors and in some cases depositors. Adding to the predicament, governments from Ireland to Germany are trying to reassure their increasingly anxious voters. Denmark and Austria were also preparing extra protection for consumer deposits in the wake of the German move.
Other European banks could face similar funding strains to those of Fortis and Hypo, requiring public or private financial aid, as investors avoid making the kind of short-term loans that banks depend on for funding. In a sign that banks' borrowing costs are rising, the euro London interbank offered rate, or Libor, a measure of the rates at which banks lend to one another, hit 5.33% Friday, compared with 4.95% on Sept. 1.
The European Central Bank still seems highly focused on inflation, in a worrying echo of the 1930s Federal Reserve. It's going to be a very . . . er . . . interesting week.
Maybe the drop in oil prices today will help change the ECB's focus. One problem Europe has that we don't -- I believe the head of the ECB may have mentioned this himself -- is the difficulty of coordinating a fiscal response across so many countries.
Awww.....and it's been sooooo easy to blame W for everything. So maybe, just maybe, this election might focus on who actually has a clue about how to move forward from here.......
Not so fast, Barack......I said we need someone with a clue about how to move forward.......
I've always understood that Europe's financial regulations were, on balance, less stringent than the U.S.'s. Indeed, one of the big arguments in favor of repealing Glass-Steagal was that European banks that combined retail deposit-taking banking with investment banking were getting more business than our own separated banks were getting. And the strictness of financial reporting has long been higher in the U.S. than in Europe (even before Sarbannes-Oxley).
I know we generally think of Europe as more highly regulated than the U.S., but that is not true across all industrial sectors.
The reason why Europe's banks are in trouble is that they bought the junky American mortgage backed securities. So your regulatory argument rings hollow. Germans don't take out sub-prime mortgages and put no money down buying houses; Americans do. It was not Germany that changed SEC rules for investment banks; America did just that in 2004.
No, what we are seeing is how interconnected global markets are, and when one has a weakness, they can potentially bring them all down. Germany still has a much higher savings rate than the U.S., so they will be better able to deal with this crisis. But no doubt, our excesses are affecting the whole world.
The reason why Europe's banks are in trouble is that they bought the junky American mortgage backed securities. So your regulatory argument rings hollow.
How so? That's exactly what US investment banks (most of whom are not in the retail mortgage business) did. Nobody forced them to.
What regulation would have both 1) prevented this and 2) successfully made it past Congress? Anybody got one?
So beachmom, if it's just our excesses that created this (a premise I don't buy) wouldn't it have been wise for the prudent Europeans -NOT- to buy our junky mortgages?
"Not so fast, Barack......I said we need someone with a clue about how to move forward......."
Did you have someone in mind? Phil Gramm perhaps? I'll take the less clueless of the two on the economy, thanks, unless we can somehow put Ron Paul back on the ballot.
Beachmom,
How do you explain the housing busts in Britain and Spain? Bush's fault?
Come on Beachmom - show us all how smart you are.
What regulation would have prevented this?
It's should be a simple question with an easy answer for someone with such an obvious surplus of worldwide economic acumen as yourself.
And Mr. "Not so fast, Barak..." do you honestly believe that John McCain has the slightest clue about what caused this or how to fix it?
Ron Paul is about the only one even close and he was hounded off the ballot and run out of town on a rail...
LOL
Nick,
Here's an example of a regulation that would have prevented the housing bubble/bust, but one that the Dems would have vociferously opposed: require that the GSEs only buy mortgages with 90% loan-to-value ratios or less (i.e., at least 10% down payments). That would have prevented most of the defaults that have bubbled through the system, but Dems would have opposed it on the grounds that it would make housing less affordable.
megan, you are like a libertarian robot who has no ability to think independently. it's like listening to a furniture salesman.
Clearly Congress needs to pass a bailout bill for the unemployed furniture salesmen whose jobs were replaced by libertarian robots.
Shoot, that bailout we could probably even afford.
An incredible financial story that doesn't seem to be getting any coverage whatsoever in North America, from the British Telegraph:
Financial crisis: Iceland's dreams go up in smoke
Wow, 313,000 people who are $100 billion in the hole. They should move to California.
I blame BushCheneyHalliburton.
Hamas is blaming the Jewish lobby. Do you suppose the left will condemn them for this? I bet not.
I work as a banking regulator. There are two major issues that have not been discussed.
1) My job doesn't change at all regardless of who is President. Presidents don't pay attention to banking examinations.
2) Regulation in the US is always started (since the 1980s) at the international level. Then applied in the US. The regulations are broadly the same throughout the developed world. That said, regulators in the US are more conservative than our international colleagues (as a general rule).
The idea that the industry has been de-regulated is truly strange - unless you're talking about hedge funds. Fannie and Freddie had become effectively de-regulated, but Democrats are probably better off not bringing that up.