EU Leaders Agree to Guarantee Bank Borrowings, Prevent Failures (Updated: Inject Capital Too)

The statement of intent by the EU today is progress but far short of a plan. However, measures by major countries are to be announced tomorrow. The statement, that each country will announce measures, may be greeted with disappointment, since there had been some hope that the summit would announce an EU program, as opposed to coordinated country-level programs.

Update 3:50 PM: More detail has been announced, and the biggest element (in terms of getting money markets functioning) is the plan to guarantee bank lending for up to five years. In theory that should help get the money markets moving, but there is no stick to accompany this rather large carrot. Banks still have the option to lean on their friendly cjunkie central bank. I’d be happier if I also saw a statement of intent to start withdrawing or cutting back on liquidity facilities, but that might be too much to absorb, particularly since the programs will vary by country.

The news story from Bloomberg was part of the original post; a New York Times story further down has more detail.

From Bloomberg

European leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under, trying to stop the financial hemorrhage and stave off a recession.

At a summit chaired by French President Nicolas Sarkozy, leaders of the 15 countries using the euro offered their most detailed battle plan yet for bandaging the crippled credit markets and halting panic among investors.

“We need concrete measures, we need unity, which is what we achieved today,” Sarkozy told a press conference at the Elysee Palace in Paris. “None of our countries acting alone could end this crisis stop.”

As they improvised a response to the banking calamity that started on Wall Street, Europe’s leaders sought to go beyond pledges made by the Group of Seven and to deflect criticism that they are taking scattershot country-by-country steps without a credible joint strategy.

The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a commitment to recapitalize any “systemically” critical banks in distress.

France, Germany, Italy and other countries will announce national measures tomorrow, Sarkozy said.

“I don’t even want to imagine what might happen” if the markets react negatively, Klaus-Peter Mueller, head of the German banking association, said earlier today in Washington before the blueprint was unveiled. The market response may be something “we haven’t seen at any stage in our lifetimes.”

A communiqué gave no indication of how much governments are willing to spend or the size of bank assets deemed at risk, leaving unclear the ultimate cost to the taxpayer.

Update 3:50 PM More detail from the New York Times:

European financial and political leaders agreed late Sunday to a plan that would inject billions of euros into their banks in a bid to restore confidence to the teetering financial system.

President Nicolas Sarkozy of France, left, welcomed Prime Minister Gordon Brown of Britain to the Élysée Palace.
Taking their cue from a rescue plan announced last week by Britain, the European countries led by Germany and France pledged to take equity stakes in distressed banks and vowed to guarantee bank lending for periods up to five years.

Following the British rescue package announced last week, countries led by Germany and France pledged to take equity stakes in distressed banks and vowed to guarantee bank lending for periods up to five years.

Both France and Germany were planning to unveil national rescue packages on Monday worth hundreds of billions of euros, officials said….

Leaders of the 15 countries that use the euro did not put a price tag on any of their promises — contrary to Britain, where Prime Minister Gordon Brown announced £150 billion, or $255 billion, in government funds and other measures, and the United States, where a $700 billion bailout plan will now partly be used to recapitalize banks.

European officials said actions would be taken at the national level, within the framework of the agreed “toolbox.” The idea, they said, was that governments face different challenges and needed to act quickly but that a common front would avoid the possibility that one country might undercut another.

Each country, Mr. Reynders said, will announce concrete figures for the measures they expect to take individually.

“There is no question of setting up a European fund,” he said.

Yves here. The markets would likely have responded well to a fund. I am not certain what the reaction will be to lesser measures. We needed to see an authoritative response. We will see soon enough if this passes muster.

Germany is considering a plan to inject 50 billion to 100 billion euros into its banks, with a price tag for all of the new measures reaching as much as 400 billion euros, or $536 billion, according to a person briefed on the government’s work. A German official cautioned that the numbers remained speculative.

Current plans are to have the package approved by the cabinet on Monday and through the German Parliament this week.

France is expected to announce a two-pronged plan aimed at safeguarding the solvency of French banks and jump-start lending between financial institution, according to a senior official who has worked on the plan.

Paris is expected to buy stakes in banks threatened by failure, though the magnitude of any rescue fund will be smaller than the 50 billion to 100 billion euro plan expected in Germany, the official said. “Our need for recapitalization is certainly weaker than that in Germany,” he said.

The French government will also pledge more than 100 billion euros to address liquidity concerns in banks and insurers. A new instrument guaranteeing bank debt in exchange for collateral will be announced, the official said. A draft law will be passed Monday in an extraordinary cabinet meeting and will be submitted Tuesday to Parliament….

Michel Fleuriet, director of the investment banking program at Université Paris-Dauphine and the former head of Merrill Lynch in France, “These measures should add some life to the short-term financing of the economy,” Mr. Fleuriet said after news of the deal. “But it’s going to take some time for the market to digest this information. If investors are convinced that that the banks are going back to doing their jobs — financing the real economy — the stock market could stabilize. Right now the stock market believes the economy is dead.”

The stock markets will make an initial judgment immediately, when even if this plan works, I’d expect to see a gradual unthawing. An incorrect thumbs down (or say an initial rally followed by a retreat into negative territory) could cast doubt on the measures before they would start to have an effect.

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  1. Ann

    CCorp and DTCC seem to be saying they are the trading platform. But have they even got their platform up and running yet?

    Citadel and ICE were talking about starting one as if one didn’t exist…

    And the New York Fed was in two meeting with the dealers to resolve it this week.

    If this is the reason for the huge cash scamble, it’s a very important story and needs to be discussed a bit more in the WSJ and FT.
    NY Fed: 2nd Meeting Fri To Discuss 4 CDS Clearing Plans

    CCorp says CDS clearing counterparty will launch by year-end

  2. Chris

    The third component will be really popular in the US. They want the US to come to a conference to reorganize the international monetary system!

    Despite the Times and the cell of Anglo-phones it really isn’t Brown’s deal. Though that won’t stop those who are going to say that,will it?

    The Belgians were talking about having a number for the lending by Wednesday. There’s a quote from Sarkozy in the German press “this isn’t a present for the banks it is to defend the economy.”

  3. Anonymous


    Doesn’t this infer that the Americans will have to field a similar program, unless they want to see deposits flee overseas?

    I am speaking specifically of the guarantee on new loans for 5 years.

    If Hank and Co. think they can “work on” something to match the European deal, and they don’t unveil something on Monday, we’re in trouble. Agreed?

    Perhaps the Morgan deal is still on the front burner. Hope they have enough smart people to work on multiple issues.

  4. Yves Smith


    Your comment was clearly meant for the other post, but I will address it here nevertheless. The ISDA has for years been trying to increase standardization of documentation and procedures around credit default swaps, admittedly at least in part due to serious prodding by regulators. There are a lot of measures that were implemented that fell well short of instituting a trading platform. It appears that one of them was to encourage dealers to provide copies of their agreements to the DTCC and to use it as a computation agent. This does NOT mean that it plays any other role beyond that described in the press release. Acting as a trading platform would mean that it provided quotes, and could allow for electronic order book, with bidding and confirmation for trades below a certain size level. If it were a clearing organization, dealers would settle trades through it (ie, they would send money to the DTCC and it would make payment to the end party). The statement said NOTHING to any such effect.

  5. bena gyerek

    missed opportunity. a joint and several guarantee of new bank borrowing by eurozone governments would have been a very strong statement.

    btw, what’s the story with switzerland? ubs already took a lot of write-downs – is this a good or a bad sign? ubs + cs balance sheets = 6.5 x swiss gdp i believe. no way switzerland could absorb significant losses from those two..

  6. Chris

    Anon 4:07

    That was the way the Irish guarantee program worked when it was announced. That program includes loan guarantees for certain classes of paper held by the qualifying banks.

    There was a flood of new deposit money into Irish banks in the UK and the Republic to take advantage of the extra protection.

    Bloomberg is reporting the Euro on the rise with the opening of Australian forex markets.

  7. toto

    finally found the communiqué :

    “Under the current exceptional circumstances, financial and non-financial institutions should be allowed as necessary to value their assets consistently with risk of default assumptions rather than immediate market value which, in illiquid markets may no longer be appropriate.”

    refering to

  8. Don

    Does the multinational plan(s) really change anything, other than who lends/injects? Is this not simply a shift from CBs as life support vehicles to the public/taxpayers?

    The intent is to re-capitalize by injecting public funds into private banks. But doesn’t this take a while to materialize? Does the time for this re-capitalization really exist?

    How does this change anything in the short term, other than its potential effects in beefing up confidence? Is it not obvious that we are passed that stage where attempts to beef up confidence are effective.

    In other words, is it not obvious that the problem is no longer one of confidence (or distrust in terms of intrabank lending)? Is it not apparent by now that what matters is that which underlies the lack of confidence (and the psychology of distrust)? Is it not true that by now what really matters is that which is the real, material force driving developments . . . not simply mental configurations of confidence or lack thereof?

    Attempting to beef up confidence, it appears the shift is to “guarantees”. Bank deposits guaranteed; intrabank lending guaranteed. So it has become a matter of governments as lenders of last resort, or only resort, because they are the only ones big enough to guarantee.

    So . . . is the next issue one of sovereign solvency?

    Certainly, everything I’m saying here is overly simplified. No doubt, I am missing what this is all about, for it just has to be much more substantive than it appears to these sore eyes.

  9. dlr

    Amateur here, but the Bloomberg article said the governments would be buying preferred shares, that means there won’t be any dilution of the common shares, right? So, no penalties at all for the bank shareholders, just a free gift, lots of money and debt guarantees going forward. Plus, implied guarantees for all of the existing bond holders, since the governments are pledging they won’t let the banks they invest in fail. What a rip off for the taxpayer.

    This is completely unjust. I would insist on massive dilution of the existing shareholders, before the capital injection by the governments. Plus all senior management removed from office. This is just a total sweetheart deal for the exact parties that caused the entire problem in the first place. A massive act of injustice.

    I hope every politician that has anything to do with this is promptly voted out of office. Poor people being forced to bail out the rich and the powerful. And don’t tell me it was necessary to ‘save the economy’, they could have saved the economy just fine without saving the shareholders and bank executives. These guys need to feel more pain, or it will be the same thing again 10 years from now.

  10. DD

    Some have said this Crisis is one of confidence. Others have said it’s one of solvency.

    I guess we are about to find out who was right.

    I shudder to think what happens next…if this does not spur more lending, as the message straight from the banks themselves will be:

    We’re Insolvent!

    The Market may hate uncertainty—but in this case, it may hate certainty even more.

    I think this guarantee was an obvious solution; therefore, I think the reasons why they were hesitant to adopt it is also obvious.

    I don’t think this is going to end well.

  11. Abbott_Of_Iona

    DD said…

    “Some have said this Crisis is one of confidence. Others have said it's one of solvency.”

    Can I try something here?

    Say there are seven banks A,B,C,D,E,F & G.

    A,B,C,D & E are (relatively) happy to lend to each other, but they don’t know that one of their number will lend to F or G, which they know (amongst themselves) are insolvent.

    Will they now lend to F & G or will they (even with the guarantee) require an additional risk premium.

    What happens to F & G if, even with the guarantee, they can’t borrow.

    Instant bankruptcy?

  12. S

    agree with poster that this is one of solvency and sovereign risk ultimitly. The Chinese denied over the weekend they were looking at a $200 billion US injection to sure up confidence in the US investments. Everyone is focused on euro and US banks and their problems, but the US is only as good as its sovereign lenders, albiet to the floight from equity will raise the appetite for $ denom treasury. The recent editorials in Moscow and China ripping the US fiscal practices is telling of how they feel about the current BWII regime. It is ending. What comes next is the real tell. Bernanke is p-laying with other peoples money – read sovereigns – every time he hits print. The current cxrisis may be about staving off collapse but beyond the battle haze lies the looming wquestion of how the dollar can possibly survive. When the US is condiered the lebder of last resort, everyone should stand up and take notice. The US has nothing to lend. The wolrd looks like it is going to increasingly demand some sort of hybrid fiat and the US, the world’s greatest beneficiary of BWII, is about to lose the freeom to frank.getting banks to lend is really a sideshow at this point. The portfolios are so loaded down with bad debt, that it will take years to work through. The US is simply taking the garbage ionto its balance sheet and assuming that banks or hoping maybe they go back to the irresponsible lending that got us here. go figure.

  13. Chris

    Here’s a link to the text of the Euro document{2DF0E7A6-A2AD-489C-AAD8-63F574DBA58C}
    (hope it works)

    Paragraph 8 is on the loan guarantees. They are available to foreign outfits and subsidiaries of foreign outfits operating in Europe provided certain conditions are met.

    May be some would see that as an incentive then, from a purely market type of standpoint, to move funds into Euro-land.

  14. thomas j

    Just another shot of Novocaine for the patient who suddenly woke up in excruciating pain during the organ harvesting procedure.

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