Post by pieter on Oct 4, 2008 12:27:17 GMT -7
European bank rescue plan in tatters amid savings stampede
Plans for a pan-European response to the global financial crisis lay in tatters last night as Greece followed Ireland in unilaterally guaranteeing all bank deposits.
Amid reports that Greek depositors were rushing to withdraw their savings, Greece's Cabinet agreed to protect all deposits whatever their size. Previously the maximum guaranteed was €20,000 (£15,600).
A proposal by President Sarkozy of France to create a European €300 billion bailout fund also collapsed, leaving attempts on this side of the Atlantic to calm investor panic and lubricate the money markets in chaos.
America's rejigged $700billion bank bailout still hangs in the balance, awaiting the approval of Congress today. But after days in which the surprises sprung by European governments had succeeded only in angering each other, the chances of a parallel joint plan from EU nations are, for now, slim to non-existent.
The latest chapter in the story of this piecemeal approach to stabilising the banking system began on Monday evening, when a group of Ireland's most senior bankers trooped into Government Buildings in Dublin.
It had been a terrible day in markets worldwide and a catastrophic one locally. One bank, Anglo Irish, had seen its shares plummet by 46 per cent. There were rumours of large depositors demanding their money, including one German customer wanting an immediate €1.5billion. Then came the horrendous news that Congress had rejected the US bailout plan.
The shaken Irish bankers were grave as they poured out their story to the Taoiseach, Brian Cowen, and the Finance Minister, Brian Lenihan. Liquidity was drying up, they said, other banks were refusing to lend to them except for the shortest periods. According to one source: “They basically said, ‘Look, tomorrow two of our banks won't survive'.”
Thus began the hatching of the explosive plan for a guarantee of all Irish bank deposits. Irish officials worked through the night to cobble together a credible plan.
There was no time to consult other governments, the European Commission or even the European Central Bank. A guarantee had to be in place before ordinary bank branches opened on Tuesday. At 4.15am the plan was completed. The promise would apply to six home-grown banks, and to no one else.
A couple of hours later Alistair Darling rose from his slumbers to be told the bad news. The Chancellor had for once had a full night's sleep, having spent most of the weekend stitching together the Bradford & Bingley deal.
Mr Darling immediately spoke by phone to Mr Lenihan. Why hadn't he been told? Why was there no consultation with other EU states? Mr Lehinan explained that there had been no time.
In Paris, President Sarkozy was already awake and grappling with his own crisis. Dexia, the Franco-Belgian bank, was in desperate trouble and short of liquidity after a 28 per cent plunge in its shares on Monday.
A limousine whisked him to the Élysée Palace, where François Fillon, the Prime Minister, was on the telephone to Yves Leterme, his Belgian counterpart.
The previous day, Mr Leterme had given his backing to the partial nationalisation of Fortis, the Benelux bank, for €11.2 billion. He had no trouble convincing French leaders that they should now help him to salvage Dexia. Mr Sarkozy and Mr Leterme both agreed to chip in €3 billion, and Jean-Claude Juncker, the Luxembourg Prime Minister, contributed €376 million. The deal was cemented while the croissants were still warm.
The rescue helped to reinforce Mr Sarkozy's belief that Europe-wide action was needed. A banking watchdog, curbs on executives' and traders' pay and a change to accountancy rules for financial institutions were among his ideas. He was warming too to the idea of a European bank rescue fund - an idea first floated by JanPeter Balkenende, the Dutch Prime Minister, who suggested that each EU state should contribute 3 per cent of its national wealth.
Back in London, share markets were stabilising after the horrors of Monday, but not for HBOS and its prospective rescuer Lloyds TSB, whose shares were plunging on growing fears that Lloyds shareholders would not support the deal on its current terms. Any failure to complete it could be disastrous for HBOS, whose shares had collapsed just before the Lloyds rescue on fears that, alone, it would suffer funding problems and a possible run.
A run of that magnitude would be unthinkable for Britain and deeply damaging personally for Gordon Brown, who two weeks earlier took the axe to normal anti-monopoly rules to wave through the deal.
Meanwhile Dublin's move was having awkward consequences. Depositors on both sides of the Irish Sea were beginning to vote with their feet. Allied Irish Bank reported a surge in new deposits, as did Bank of Ireland, as anxious savers rushed to pull their money from British-owned banks and put it in the six favoured institutions with a rock-solid guarantee.
British bank leaders were furious. Dublin's move might be good for Irish banks but it was bad for British ones, for whom deposits were lifeblood in such difficult conditions. By Tuesday evening, several banking leaders were putting their concerns directly to Mr Brown, Mr Darling and Mervyn King, Governor of the Bank of England, in a conference call.
The freezing of the money markets was still worsening in spite of hopes that a revamped US bailout plan could be passed. They asked for more liquidity. Specifically they wanted the Bank of England to relax the rules of its Special Liquidity Scheme (SLS), a mechanism that is already thought to have injected more than £100 billion into the banking system.
Mr Brown refused to follow Dublin's lead in guaranteeing all deposits.
By Wednesday, the fury over Ireland's unilateral guarantee was hardening in the City and across Europe. British banks were incandescent with their Irish counterparts, whom they accused of having deliberately exploited the situation to ring up corporate depositors and urge them to defect to “safer” Irish banks.
The case for an ambitious, co-ordinated response across Europe seemed stronger than ever to some on the Continent. That evening one European government source disclosed that France wanted Britain, Germany and Italy to back a €300 billion bank rescue fund at Mr Sarkozy's planned summit this weekend.
Within minutes, however, a German government spokesman bluntly rejected the idea in comments echoed by Angela Merkel. Confusion set in as French officials accused Germany of leaking the scheme to kill it off.
By late Wednesday evening French officials were changing tack to describe the €300billion fund as a Dutch idea, which they had always rejected. The Hague said it had no idea what France was talking about
The Élysée announced that a meeting between Mr Sarkozy and Mr Balkenende, due that evening, had been postponed for a day because the Dutch Prime Minister “has a problem with his airplane”.
By yesterday lunchtime, Hendrieneke Bolhaar, a Dutch finance ministry spokesman, said that the idea for a bank rescue fund had come from The Hague after all.
But farce then took over as Mr Balkenende emerged from his meeting with Mr Sarkozy - held after his aircraft started working again - to slap down the spokesman. There has “never been any question of a European fund”. It is all a “misunderstanding”, he said.
Instead, taking up a concept first mooted by Mr Balkenende, Mr Sarkozy is expected to float the idea that each EU country demonstrate that it has at least 3 per cent of its GDP at its disposal to help out in a financial crisis.
One EU diplomat told The Times that early French thinking on co-ordinated national funds had probably been mistakenly conflated into the idea of an EU fund, given that 3 per cent of EU GDP amounts to around €300 billion.
With the fund off the agenda, Mr Sarkozy finally persuaded Mr Brown and Mrs Merkel to meet him, Silvio Berlusconi, Mr Juncker, José Manuel Barroso, the European Commission chairman, and Jean-Louis Trichet, the chairman of the European Central Bank, in Paris on Saturday afternoon.
The official aim is merely to agree on a European plan for tighter investment bank regulation to put to the next G8 summit. Unoffically, Mr Sarkozy would also like a decision on a EU response to the crisis and at the very least an agreement not to follow Ireland's - and now Greece's - go-it-alone example.
But there has been little this week by the way of co-ordination to suggest that the plan has a chance.
Additional reporting by Adam Sage, Francis Elliott, David Sharrock and David Charter
Plans for a pan-European response to the global financial crisis lay in tatters last night as Greece followed Ireland in unilaterally guaranteeing all bank deposits.
Amid reports that Greek depositors were rushing to withdraw their savings, Greece's Cabinet agreed to protect all deposits whatever their size. Previously the maximum guaranteed was €20,000 (£15,600).
A proposal by President Sarkozy of France to create a European €300 billion bailout fund also collapsed, leaving attempts on this side of the Atlantic to calm investor panic and lubricate the money markets in chaos.
America's rejigged $700billion bank bailout still hangs in the balance, awaiting the approval of Congress today. But after days in which the surprises sprung by European governments had succeeded only in angering each other, the chances of a parallel joint plan from EU nations are, for now, slim to non-existent.
The latest chapter in the story of this piecemeal approach to stabilising the banking system began on Monday evening, when a group of Ireland's most senior bankers trooped into Government Buildings in Dublin.
It had been a terrible day in markets worldwide and a catastrophic one locally. One bank, Anglo Irish, had seen its shares plummet by 46 per cent. There were rumours of large depositors demanding their money, including one German customer wanting an immediate €1.5billion. Then came the horrendous news that Congress had rejected the US bailout plan.
The shaken Irish bankers were grave as they poured out their story to the Taoiseach, Brian Cowen, and the Finance Minister, Brian Lenihan. Liquidity was drying up, they said, other banks were refusing to lend to them except for the shortest periods. According to one source: “They basically said, ‘Look, tomorrow two of our banks won't survive'.”
Thus began the hatching of the explosive plan for a guarantee of all Irish bank deposits. Irish officials worked through the night to cobble together a credible plan.
There was no time to consult other governments, the European Commission or even the European Central Bank. A guarantee had to be in place before ordinary bank branches opened on Tuesday. At 4.15am the plan was completed. The promise would apply to six home-grown banks, and to no one else.
A couple of hours later Alistair Darling rose from his slumbers to be told the bad news. The Chancellor had for once had a full night's sleep, having spent most of the weekend stitching together the Bradford & Bingley deal.
Mr Darling immediately spoke by phone to Mr Lenihan. Why hadn't he been told? Why was there no consultation with other EU states? Mr Lehinan explained that there had been no time.
In Paris, President Sarkozy was already awake and grappling with his own crisis. Dexia, the Franco-Belgian bank, was in desperate trouble and short of liquidity after a 28 per cent plunge in its shares on Monday.
A limousine whisked him to the Élysée Palace, where François Fillon, the Prime Minister, was on the telephone to Yves Leterme, his Belgian counterpart.
The previous day, Mr Leterme had given his backing to the partial nationalisation of Fortis, the Benelux bank, for €11.2 billion. He had no trouble convincing French leaders that they should now help him to salvage Dexia. Mr Sarkozy and Mr Leterme both agreed to chip in €3 billion, and Jean-Claude Juncker, the Luxembourg Prime Minister, contributed €376 million. The deal was cemented while the croissants were still warm.
The rescue helped to reinforce Mr Sarkozy's belief that Europe-wide action was needed. A banking watchdog, curbs on executives' and traders' pay and a change to accountancy rules for financial institutions were among his ideas. He was warming too to the idea of a European bank rescue fund - an idea first floated by JanPeter Balkenende, the Dutch Prime Minister, who suggested that each EU state should contribute 3 per cent of its national wealth.
Back in London, share markets were stabilising after the horrors of Monday, but not for HBOS and its prospective rescuer Lloyds TSB, whose shares were plunging on growing fears that Lloyds shareholders would not support the deal on its current terms. Any failure to complete it could be disastrous for HBOS, whose shares had collapsed just before the Lloyds rescue on fears that, alone, it would suffer funding problems and a possible run.
A run of that magnitude would be unthinkable for Britain and deeply damaging personally for Gordon Brown, who two weeks earlier took the axe to normal anti-monopoly rules to wave through the deal.
Meanwhile Dublin's move was having awkward consequences. Depositors on both sides of the Irish Sea were beginning to vote with their feet. Allied Irish Bank reported a surge in new deposits, as did Bank of Ireland, as anxious savers rushed to pull their money from British-owned banks and put it in the six favoured institutions with a rock-solid guarantee.
British bank leaders were furious. Dublin's move might be good for Irish banks but it was bad for British ones, for whom deposits were lifeblood in such difficult conditions. By Tuesday evening, several banking leaders were putting their concerns directly to Mr Brown, Mr Darling and Mervyn King, Governor of the Bank of England, in a conference call.
The freezing of the money markets was still worsening in spite of hopes that a revamped US bailout plan could be passed. They asked for more liquidity. Specifically they wanted the Bank of England to relax the rules of its Special Liquidity Scheme (SLS), a mechanism that is already thought to have injected more than £100 billion into the banking system.
Mr Brown refused to follow Dublin's lead in guaranteeing all deposits.
By Wednesday, the fury over Ireland's unilateral guarantee was hardening in the City and across Europe. British banks were incandescent with their Irish counterparts, whom they accused of having deliberately exploited the situation to ring up corporate depositors and urge them to defect to “safer” Irish banks.
The case for an ambitious, co-ordinated response across Europe seemed stronger than ever to some on the Continent. That evening one European government source disclosed that France wanted Britain, Germany and Italy to back a €300 billion bank rescue fund at Mr Sarkozy's planned summit this weekend.
Within minutes, however, a German government spokesman bluntly rejected the idea in comments echoed by Angela Merkel. Confusion set in as French officials accused Germany of leaking the scheme to kill it off.
By late Wednesday evening French officials were changing tack to describe the €300billion fund as a Dutch idea, which they had always rejected. The Hague said it had no idea what France was talking about
The Élysée announced that a meeting between Mr Sarkozy and Mr Balkenende, due that evening, had been postponed for a day because the Dutch Prime Minister “has a problem with his airplane”.
By yesterday lunchtime, Hendrieneke Bolhaar, a Dutch finance ministry spokesman, said that the idea for a bank rescue fund had come from The Hague after all.
But farce then took over as Mr Balkenende emerged from his meeting with Mr Sarkozy - held after his aircraft started working again - to slap down the spokesman. There has “never been any question of a European fund”. It is all a “misunderstanding”, he said.
Instead, taking up a concept first mooted by Mr Balkenende, Mr Sarkozy is expected to float the idea that each EU country demonstrate that it has at least 3 per cent of its GDP at its disposal to help out in a financial crisis.
One EU diplomat told The Times that early French thinking on co-ordinated national funds had probably been mistakenly conflated into the idea of an EU fund, given that 3 per cent of EU GDP amounts to around €300 billion.
With the fund off the agenda, Mr Sarkozy finally persuaded Mr Brown and Mrs Merkel to meet him, Silvio Berlusconi, Mr Juncker, José Manuel Barroso, the European Commission chairman, and Jean-Louis Trichet, the chairman of the European Central Bank, in Paris on Saturday afternoon.
The official aim is merely to agree on a European plan for tighter investment bank regulation to put to the next G8 summit. Unoffically, Mr Sarkozy would also like a decision on a EU response to the crisis and at the very least an agreement not to follow Ireland's - and now Greece's - go-it-alone example.
But there has been little this week by the way of co-ordination to suggest that the plan has a chance.
Additional reporting by Adam Sage, Francis Elliott, David Sharrock and David Charter