Post by Jaga on Oct 11, 2008 7:01:44 GMT -7
Iceland is hurting the most since it was offering high interests (15%) in his banks. Now Iceland is taking a loan from Russia.
Here is more:
business.theage.com.au/business/wild-week-on-world-financial-stage-shows-split-in-european-unions-ranks-20081010-4yeh.html
French President Nicolas Sarkozy, wearing his EU presidency hat, said after the meeting that the industrialised powers would work jointly to protect European banks — yet in the same breath said that each country would "operate within their own methods and means". This set the scene for the breakdown of EU unity.
Not even the savviest political spin doctor could hail the meeting a success; the whiplash from the markets was immediate. In London on Monday, the FTSE 100 lost 7.85%, its biggest fall in
21 years; Germany's Dax Index lost 7.39% and France's Cac-40 fell 9.04% — the biggest one-day fall in its 20-year history. Lannoo said: "It was so obvious to me that they (EU leaders) should take a structural solution but they said no. That's why it's so depressing. You work on something over so many years; to see it destroyed is very depressing."
One by one, smaller EU countries yielded to domestic politics. Ireland went first, infuriating its neighbours by announcing on October 1 that it would guarantee 100% of savers' deposits. Greece was next, then Germany, whose Chancellor, Angela Merkel, said that no despositor would lose money.
Denmark, Sweden, Austria and Portugal followed this week, guaranteeing deposits, despite a hastily drafted agreement between EU finance ministers on Tuesday that each country would guarantee only up to €50,000 ($A99,000) per depositor. Spain then pledged to protect up to €100,000, and injected €30 billion into the country's banking system to free up credit flow.
Many experts criticise the individual savings guarantees as exposing domestic economies to more risk. Peter Hahn, of Cass Business School in London, said he understood why smaller countries rushed into action. "They are buffeted by big winds," he said. "But by guaranteeing deposits, you take the risk but you don't have enough control." Governments, he said, were effectively handing public money to bank managements to gamble with, providing no upside for taxpayers if the banks recovered, and potentially devastating costs if they collapsed.
This worst-case scenario eventuated much more quickly than anyone had imagined. As Iceland's currency plunged by a quarter against the euro and its banking shares were suspended, events became a headline writer's paradise when Geir Haarde, the country's Prime Minister, faced the cameras. He said: "There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy."
There was no question: the tiny country, population 320,000, was in meltdown. Where America's $US700 billion ($A1.01 trillion) bail-out plan represents nearly 5% of that country's gross domestic product, before the crisis the foreign assets of Iceland's banks were worth more than 10 times its GDP, with debts to match, according to Jon Danielsson of the London School of Economics.
"In a crisis, such as the one we are experiencing now, the strength of a bank's balance sheet is of little consequence," he said. "What matters is the explicit or implicit guarantee provided by the state to the banks to back up their assets and provide liquidity. The relative size of the Icelandic banking system means that the Government is in no position to guarantee the banks, unlike in other European countries."
By Thursday, most of Iceland's banks were under state control. But Iceland's ability to provide the appropriate level of funding for retail and commercial depositors was in serious doubt, and its government was negotiating with Switzerland and Russia to secure billions of dollars in loans.
The Icelandic experience contrasted with British Prime Minister Gordon Brown's announcement on Wednesday of a £500 billion ($A1.25 trillion) plan to avert a banking collapse. This came after shares in Royal Bank of Scotland plunged 39%, on top of a 20% fall the day before, and HBOS dropped by 41%. The three-pronged plan bears some similarities to Warren Buffett's innovative — and lucrative — rescue deal for Goldman Sachs. It involves recapitalising banks by spending up to £50 billion in exchange for preference shares; making £100 billion in short-term loans available from the Bank of England (on top of £100 million already available), and, most crucially, up to £250 billion in loan guarantees to encourage banks to lend to each other.
The decision, which came just before a co-ordinated cut in interest rates by six central banks, was welcomed by business leaders and analysts, although the markets took some 24 hours to digest the news. Marco Annunziata, global chief economist at UniCredit, said:
"I do think the inability or unwillingness of EU politicians to launch a co-ordinated reaction has undermined market confidence and might well be one reason why European markets have reacted with such scepticism to (the) co-ordinated rate cut. (But) I think the UK plan is extremely well structured, as it addresses the three key problems: it strengthens capitalisations, it provides liquidity, and it facilitates funding through a system of guarantees. It is extremely well targeted, and I do believe it will be effective."
With most of the European financial brushfires doused — or at least detected — questions are now being asked about how this could have happened in an integrated EU and its well-established euro zone. Did the bloc bring this on itself, through the structural and political weaknesses that Lannoo bemoans? And what will change as a result? It raises inevitable doubts about whether the model of an integrated economic zone can only work in good times.
Hahn cites two main factors for the financial crisis being allowed to spiral to the level it did across the euro zone: smugness and naivety about the impact of the US subprime contagion, and a lack of central regulation.
German Finance Minister Peer Steinbruck has become the pin-up boy for untimely gaffes and insouciance after saying late last month that there was no need for Germany, or Europe, to launch an action like the US Treasury's plan because the crisis was an "American problem". Days later, his government announced a €50 billion plan to save Hypo Real Estate, one of the country's biggest banks. Bank of France governor Christian Noyer also appeared to be facing the wrong way when he said on October 1 that "there is no drama in front of us".
But structurally, all fingers point to the lack of a central EU banking regulator. Under the 1992 Maastrict Treaty, which created the European Central Bank, the institution cannot supervise banks or their financial health. So as banks have expanded across the Continent in the intervening 16 years, regulation has not kept pace. ECB president Jean-Claude Trichet noted this fact this week when he said: "There are limits to what we can do, as we can't intervene with solvency problems."
Hahn said: "Certainly there's been an obvious void in international regulation on a European scale. That has to be addressed. In a banking system that 25 years ago was largely national, but has gone global, we didn't come up with a global regulator."
Instead, oversight of EU banks has been left to national authorities. Small, but ultimately ineffectual, steps were taken towards a unified approach. In April, EU finance ministers signed a memorandum of understanding to favour private-sector rescues, and to consider in advance which member states would be liable for banks that operate in more than one country. But this agreement, while good in theory, has been of tragically little use in this climate where — as in the US and Britain — agility and direct communication between central banks and treasuries are seen as key contributors to restoring confidence and averting a depression.
So, one week on, the EU as an institution appears, at least publicly, no further forward in its approach to the urgent short-term problems of how to reinvigorate interbank lending and shore up its banks, and the long-term issue of improving regulation.
Brown, in an article in The Times yesterday, made a direct appeal to the G7 leaders to follow the model of the British banking bail-out. He urged them to provide capital to shore up banks' solvency, inject funds into short and medium-term money markets, and called for "cross-border supervisors" to be "introduced immediately".
"National systems of supervision are simply inadequate to cope with the huge cross-continental flows of capital in this new, ever more interdependent world," he wrote, referring specifically to the Financial Stability Forum — an association of central banks and regulators from around the world — and a reformed International Monetary Fund as potential starting points.
Brown may have a point. Simon Johnson, a professor at the MIT Sloan School of Management, and Peter Boone, chairman of Effective Intervention, a British charity with economic foundations, urged the rest of Europe to follow the British plan for the sake of consistency.
In an opinion piece for the Financial Times, they wrote: "Europe needs a co-ordinated plan to recapitalise nearly all its banks. The recent announcements by (Chancellor of the Exchequer) Alistair Darling sound highly encouraging in this regard. However, if implemented, it will put British banks at a clear advantage to highly leveraged Continental banks, so Europe needs to follow suit."
But despite grand statements of co-operation from EU politicians during the week, there were indications that they will continue to sing from different song sheets: yesterday the Germans said they had no plans to adopt Brown's program, and French officials also began briefing the media, saying that the interbank lending market was not as frozen in the euro zone as it was in Britain, so it would require a different strategy.
Many eyes will be on Sarkozy, and his ability — and willingness — to deliver a second-round knockout solution. Optimists point to his negotiation of a ceasefire between Russia and Georgia in August as a good indicator of his veracity and commitment to the EU cause.
But others, such as Lannoo, believe the EU presidency gives Sarkozy just more power to throw his country's weight around. "What is happening in the corridors, we will find in a few months," Lannoo said. But as the events of the past week have shown, a few months may be much, much too long.
...
Here is more:
business.theage.com.au/business/wild-week-on-world-financial-stage-shows-split-in-european-unions-ranks-20081010-4yeh.html
French President Nicolas Sarkozy, wearing his EU presidency hat, said after the meeting that the industrialised powers would work jointly to protect European banks — yet in the same breath said that each country would "operate within their own methods and means". This set the scene for the breakdown of EU unity.
Not even the savviest political spin doctor could hail the meeting a success; the whiplash from the markets was immediate. In London on Monday, the FTSE 100 lost 7.85%, its biggest fall in
21 years; Germany's Dax Index lost 7.39% and France's Cac-40 fell 9.04% — the biggest one-day fall in its 20-year history. Lannoo said: "It was so obvious to me that they (EU leaders) should take a structural solution but they said no. That's why it's so depressing. You work on something over so many years; to see it destroyed is very depressing."
One by one, smaller EU countries yielded to domestic politics. Ireland went first, infuriating its neighbours by announcing on October 1 that it would guarantee 100% of savers' deposits. Greece was next, then Germany, whose Chancellor, Angela Merkel, said that no despositor would lose money.
Denmark, Sweden, Austria and Portugal followed this week, guaranteeing deposits, despite a hastily drafted agreement between EU finance ministers on Tuesday that each country would guarantee only up to €50,000 ($A99,000) per depositor. Spain then pledged to protect up to €100,000, and injected €30 billion into the country's banking system to free up credit flow.
Many experts criticise the individual savings guarantees as exposing domestic economies to more risk. Peter Hahn, of Cass Business School in London, said he understood why smaller countries rushed into action. "They are buffeted by big winds," he said. "But by guaranteeing deposits, you take the risk but you don't have enough control." Governments, he said, were effectively handing public money to bank managements to gamble with, providing no upside for taxpayers if the banks recovered, and potentially devastating costs if they collapsed.
This worst-case scenario eventuated much more quickly than anyone had imagined. As Iceland's currency plunged by a quarter against the euro and its banking shares were suspended, events became a headline writer's paradise when Geir Haarde, the country's Prime Minister, faced the cameras. He said: "There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy."
There was no question: the tiny country, population 320,000, was in meltdown. Where America's $US700 billion ($A1.01 trillion) bail-out plan represents nearly 5% of that country's gross domestic product, before the crisis the foreign assets of Iceland's banks were worth more than 10 times its GDP, with debts to match, according to Jon Danielsson of the London School of Economics.
"In a crisis, such as the one we are experiencing now, the strength of a bank's balance sheet is of little consequence," he said. "What matters is the explicit or implicit guarantee provided by the state to the banks to back up their assets and provide liquidity. The relative size of the Icelandic banking system means that the Government is in no position to guarantee the banks, unlike in other European countries."
By Thursday, most of Iceland's banks were under state control. But Iceland's ability to provide the appropriate level of funding for retail and commercial depositors was in serious doubt, and its government was negotiating with Switzerland and Russia to secure billions of dollars in loans.
The Icelandic experience contrasted with British Prime Minister Gordon Brown's announcement on Wednesday of a £500 billion ($A1.25 trillion) plan to avert a banking collapse. This came after shares in Royal Bank of Scotland plunged 39%, on top of a 20% fall the day before, and HBOS dropped by 41%. The three-pronged plan bears some similarities to Warren Buffett's innovative — and lucrative — rescue deal for Goldman Sachs. It involves recapitalising banks by spending up to £50 billion in exchange for preference shares; making £100 billion in short-term loans available from the Bank of England (on top of £100 million already available), and, most crucially, up to £250 billion in loan guarantees to encourage banks to lend to each other.
The decision, which came just before a co-ordinated cut in interest rates by six central banks, was welcomed by business leaders and analysts, although the markets took some 24 hours to digest the news. Marco Annunziata, global chief economist at UniCredit, said:
"I do think the inability or unwillingness of EU politicians to launch a co-ordinated reaction has undermined market confidence and might well be one reason why European markets have reacted with such scepticism to (the) co-ordinated rate cut. (But) I think the UK plan is extremely well structured, as it addresses the three key problems: it strengthens capitalisations, it provides liquidity, and it facilitates funding through a system of guarantees. It is extremely well targeted, and I do believe it will be effective."
With most of the European financial brushfires doused — or at least detected — questions are now being asked about how this could have happened in an integrated EU and its well-established euro zone. Did the bloc bring this on itself, through the structural and political weaknesses that Lannoo bemoans? And what will change as a result? It raises inevitable doubts about whether the model of an integrated economic zone can only work in good times.
Hahn cites two main factors for the financial crisis being allowed to spiral to the level it did across the euro zone: smugness and naivety about the impact of the US subprime contagion, and a lack of central regulation.
German Finance Minister Peer Steinbruck has become the pin-up boy for untimely gaffes and insouciance after saying late last month that there was no need for Germany, or Europe, to launch an action like the US Treasury's plan because the crisis was an "American problem". Days later, his government announced a €50 billion plan to save Hypo Real Estate, one of the country's biggest banks. Bank of France governor Christian Noyer also appeared to be facing the wrong way when he said on October 1 that "there is no drama in front of us".
But structurally, all fingers point to the lack of a central EU banking regulator. Under the 1992 Maastrict Treaty, which created the European Central Bank, the institution cannot supervise banks or their financial health. So as banks have expanded across the Continent in the intervening 16 years, regulation has not kept pace. ECB president Jean-Claude Trichet noted this fact this week when he said: "There are limits to what we can do, as we can't intervene with solvency problems."
Hahn said: "Certainly there's been an obvious void in international regulation on a European scale. That has to be addressed. In a banking system that 25 years ago was largely national, but has gone global, we didn't come up with a global regulator."
Instead, oversight of EU banks has been left to national authorities. Small, but ultimately ineffectual, steps were taken towards a unified approach. In April, EU finance ministers signed a memorandum of understanding to favour private-sector rescues, and to consider in advance which member states would be liable for banks that operate in more than one country. But this agreement, while good in theory, has been of tragically little use in this climate where — as in the US and Britain — agility and direct communication between central banks and treasuries are seen as key contributors to restoring confidence and averting a depression.
So, one week on, the EU as an institution appears, at least publicly, no further forward in its approach to the urgent short-term problems of how to reinvigorate interbank lending and shore up its banks, and the long-term issue of improving regulation.
Brown, in an article in The Times yesterday, made a direct appeal to the G7 leaders to follow the model of the British banking bail-out. He urged them to provide capital to shore up banks' solvency, inject funds into short and medium-term money markets, and called for "cross-border supervisors" to be "introduced immediately".
"National systems of supervision are simply inadequate to cope with the huge cross-continental flows of capital in this new, ever more interdependent world," he wrote, referring specifically to the Financial Stability Forum — an association of central banks and regulators from around the world — and a reformed International Monetary Fund as potential starting points.
Brown may have a point. Simon Johnson, a professor at the MIT Sloan School of Management, and Peter Boone, chairman of Effective Intervention, a British charity with economic foundations, urged the rest of Europe to follow the British plan for the sake of consistency.
In an opinion piece for the Financial Times, they wrote: "Europe needs a co-ordinated plan to recapitalise nearly all its banks. The recent announcements by (Chancellor of the Exchequer) Alistair Darling sound highly encouraging in this regard. However, if implemented, it will put British banks at a clear advantage to highly leveraged Continental banks, so Europe needs to follow suit."
But despite grand statements of co-operation from EU politicians during the week, there were indications that they will continue to sing from different song sheets: yesterday the Germans said they had no plans to adopt Brown's program, and French officials also began briefing the media, saying that the interbank lending market was not as frozen in the euro zone as it was in Britain, so it would require a different strategy.
Many eyes will be on Sarkozy, and his ability — and willingness — to deliver a second-round knockout solution. Optimists point to his negotiation of a ceasefire between Russia and Georgia in August as a good indicator of his veracity and commitment to the EU cause.
But others, such as Lannoo, believe the EU presidency gives Sarkozy just more power to throw his country's weight around. "What is happening in the corridors, we will find in a few months," Lannoo said. But as the events of the past week have shown, a few months may be much, much too long.
...