The World from Berlin: Knowing When to Reach for the Fire Extinguisher
Ireland's unilateral decision to guarantee all deposits has ignited a banking firestorm. The EU is calling for member states to wait for a unified response. Fearing that they might have to assume much of the risk, German commentators are not thrilled about the current round of EU proposals.
A highly-animated European Commission President Jose Manuel Barroso during Wednesday's press briefing on the financial crisis.
"We are asking and urging member states for closer cooperation," Barroso told reporters in Brussels on Wednesday. "It's not just a problem of injecting liquidity. We also need to inject credibility in the European response."
Worries about whether the European response was being splintered have been precipitated by Ireland's unilateral decision to guarantee all deposits in Irish banks, which the country's parliament approved early Thursday. Mention of the plan infuriated many across the EU who feel that the action will unfairly draw money away from other banks and toward the presumably safer Irish institutions.
As an alternative to such unilateral responses, French Finance Minister Christine Lagarde suggested the creation of a "European safety net." Fearing that it would be forced to make the biggest contributions to any such mechanism, Germany responded harshly to the suggestion, with Chancellor Angela Merkel saying that Germany "cannot and will not issue a blank check for all banks, regardless of whether they behave in a responsible manner or not."
On Wednesday, the European Commission proposed a number of legislative measures that would try to force banks to back their risks with greater capital and to retain at least 5 percent of repackaged debt or securitized products. It would also limit how much banks can lend to a single party.
The Commission also proposed changing rules in fair-value accounting. Such changes include no longer requiring companies to regularly restate the value of their assets based on changing market prices, a requirement that many believe helped worsen the current credit crisis.
A number of European officials are now schedule to meet in Paris on Saturday in what has been dubbed "a mini economic summit" to discuss possible reforms to banking, financial and accounting systems in Europe.
On Thursday's opinion pages, German commentators are digesting the proposals. Most don't like what they see.
The center-right Frankfurter Allgemeine Zeitung writes:
"The European Commission has submitted a number of proposals for tightening bank regulations. Of course, the Commission is looking for public approval, but it is also giving off the impression that it is turning against the irresponsible speculators on the financial markets while simultaneously looking after the interests of banking clients."
"Nevertheless, some doubts are arising as to whether these proposals are really any more that elaborate, half-backed ideas. At the moment, governments and the central banks are preoccupied with stabilizing a financial system that is getting deeper and deeper into trouble. Once the crisis has come to an end and things have gotten a bit calmer, decisions about long-term regulation of the financial industry should be made. … But that in no way means that more regulation will necessarily bring better results…"
"It's questionable whether the retention proposed by Brussels will solve the problem. If the retention is only small, it gives the banks little incentive to accurately estimate their credit risks. If the retention is large, it imposes tough constraints on the effected banks' ability to act. Under such circumstances, they would be put at a competitive disadvantage on the international stage with banks in other regions where there is no (mandatory) retention. Some very careful thought needs to be put into these questions. Quick solutions -- like those fired off by Brussels -- don't help at all."
The financial daily Handelsblatt writes:
"Is there really any European competition policy for the financial sector? This crisis has completely steamrolled EU competition authorities, and those officials who are so enamored with subsidies criteria are now in a state of utter shock ..."
"The EU lacks an entity that is capable of intervening with both financial and personnel resources in real time. Whenever a large bank is teetering on the edge of collapse, no one seems to care much about whether the bailout really works for the timid competition watchdog agency in Brussels with all its quarrelling competencies."
"It is in moments of crisis that politicians show their true colors. For this reason, it's no surprise that no one has heard anything enlightening from Mr. Barroso, the president of the European Commission. In economic terms, that is not a good thing. Once the crisis cools down, we will have to live -- for years if not decades -- with the new structures shooting up volcano-like in this chaotic time."
The Financial Times Deutschland writes:
"Now the stock exchange authorities and elected officials want to break the next taboo by drastically relaxing the strict accounting requirements mandated by the US GAAP (Generally Accepted Accounting Principles) in order to give the banks a little breathing room."
"This is a necessary capitulation. Since the financial crisis broke out, the effect of the fair-value principle as a fire accelerant has become increasingly more apparent. When market prices are falling, it pushes them even further down. In doing so, it has played a huge role in this last quarter's steep landslide of write-downs ..."
"In absolutely exceptional situations, such as those we have seen in recent days, there is choice regarding whether you reach for the fire extinguisher. Even when the relaxation of requirements causes financial statements to become a bit less transparent, in a time when no one has anymore faith in number crunching, it is absolutely necessary to do everything you can to relieve some pressure on financial statements."
-- Josh Ward, 1:30 p.m. CET
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