Bailout Divide
Europe Looks for a Financial Crisis Plan
The European Union is divided about whether a bailout plan for European banks is needed. France allegedly proposed such an idea, but Germany isn't biting. Meanwhile, more and more banks are parking their money at the European Central Bank.
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Europe seems to be moving away from a bailout 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 debt 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 financial 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 the 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."
CHRONOLOGY OF THE FINANCIAL CRISIS
Two hedge funds belonging to New York investment bank Bear Stearns collapse as a result of the subprime mortgage crisis. The failure of the funds cause investor losses of some $1.8 billion.
German banks -- including IKB, Sachsen LB, WestLB and BayernLB -- are caught in the crisis. Multi-billion euro bailouts are needed to stabilize the banks' balance sheets.
Worried customers line up outside branches of the British bank Northern Rock to pull out their savings.
US financial services company Citigroup's profits collapse. From then on, one financial group after another announce billions of dollars of writedowns and high losses.
Swiss bank UBS announces writedowns of more than $18 billion for 2007 due to turbulence in US property markets. In April, the bank announces a further $19 billion in writedowns.
US Congress approves an economic stimulus package of about $150 billion.
Bear Stearns stands on the brink of collapse, leading to JP Morgan Chase acquiring the investment bank under pressure from the US Federal Reserve. The Federal Reserve assumes the risk on $30 billion in Bear Stearns investments.
Deutsche Bank announces a loss of €141 billion ($203 billion) for the first quarter -- the bank's first quarterly loss in five years.
Californian mortgage bank IndyMac collapses. US mortgage giants Fannie Mae and Freddie Mac fall into increasing difficulties. In Spain, real-estate and construction group Martinsa-Fadesa is forced to declare bankruptcy.
The US government takes over Fannie Mae and Freddie Mac. The crisis at Lehman Brothers, a US investment bank, becomes acute. Other financial institutions such as investment bank Merrill Lynch, insurance corporation AIG, and Washington Mutual -- the biggest US savings bank -- are all affected.
"Black Monday." Lehman Brothers declares bankruptcy, Merrill Lynch is purchased by Bank of America, and AIG announces it needs billions in stop-gap loans. Bank writedowns from around the world total nearly $500 billion.
News that AIG, the world's largest insurer, is threatened with insolvency creates massive instability in international financial markets. Efforts by the insurance industry to save the company founder. Finally, the Federal Reserve announces it will provide AIG with an $85 billion loan in exchange for a nearly 80 percent stake in the troubled giant.
Scottish mortgage bank Halifax Bank of Scotland (HBOS) captures worldwide attention with more bad news. The stricken bank desperately seeks investors. Bank of Scotland enters talks with Lloyd's, according to the BBC.
News breaks that the state-owned German development bank KfW transferred €300 million ($426 million) to Lehman Brothers in New York just prior the investment bank's collapsed. More than half of the sum is lost.
US Treasury Secretary Henry Paulson announces the planned creation of a $700 billion rescue package to buy bad credit from failing banks. After a full weekend of negotiations in Washington, the fate of the bill is to be decided within a week.
News of the possible $700 billion bailout calms the financial markets only temporarily. Before long the price of oil rises more than $25 in just a few hours -- the highest absolute hike in one day since oil prices began to be monitored. Experts see this as a reason to be skeptical of the bailout. The dollar also loses considerable value.
The price of crude oil eases during trading on the Asian markets. Traders attribute the price decrease to investors cashing in on profits.
Powerful US investor Warren Buffett makes headlines with a hefty investment in Goldman Sachs. Analysts hail the legendary financial strategist as a savior.
A summit in the White House to discuss the rescue package falters. A few hours later, bank supervisors announce that US savings bank Washington Mutual is broke.
It looks as though both Democrats and Republicans in the US Congress would support the $700 billion bailout plan for needy banks.
The financial crisis reached new heights in Europe. German mortgage bank Hypo Real Estate is bailed out with €35 billion ($50 billion). British mortgage lender Bradford & Bingley and Belgian-Dutch Hypo Real Estate Holding AG are both bailed out with sums in the billions of euros. US representatives reject the $700 billion bailout package, and stock markets collapse around the world.
cgh -- with wire reports
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