Imitation is the sincerest form of flattery. The bailout bill discussions in the US have apparently emboldened politicians on the other side of the pond to suggest massive rescue efforts.
As we have said, one of our colleagues who has high level regulatory contacts in the US and Europe has been telling us for quite some time that European banks are in worse shape than ones in the US. That is plausible because they are more highly geared (ie, have less equity for every dollar of assets on their balance sheet), so their ability to take losses or writedowns is correspondingly lower. They were also active buyers of US mortgage-related paper, particularly the late-in-the-cycle, really drecky stuff. And some also have exposure to overheated domestic real estate markets, most notably Ireland, Spain, and England.
The calls from France are nevertheless curious, since heretofore (to my knowledge, people with insight into the French banks are encouraged to speak up) UBS is the European bank that is on most observers’ short list of financial firms that look to be at risk of real trouble, and much of the Spanish banking system has been on near-life support from the ECB. However, BNP Paribas is a major derivatives player, so they could have taken big hits on the Lehman failure, and SocGen took its well-covered loss from rogue trader Jerome Kerviel.
From the Times Online (hat tip reader Saboor):
France heaped pressure on Gordon Brown last night by floating an ambitious plan for a ¤300 billion (£237 billion) bailout fund to rescue crippled banks across Europe.
As the world held its breath on the fate of America’s $700 billion bank bailout plan, President Sarkozy was seeking the backing of European leaders for his own lifeboat.
Mr Brown also faced demands for action from British banks, furious that the Irish Republic’s unilateral guarantee of all bank savings on Tuesday was robbing them of precious deposits. The British Bankers’ Association, which represents high street banks, said that the move was anti-competitive and that it was raising the issue with Dublin. Some banks would like to see the UK respond with its own explicit guarantee….
Mr Sarkozy, whose country holds the European presidency, is seeking Mr Brown’s support before an emergency summit, scheduled tentatively for Saturday, with Silvio Berlusconi, the Italian Prime Minister, and Angela Merkel, the German Chancellor. His proposal was greeted with scepticism in Britain and outright hostility in Germany. It appears to involve the creation of a Europe-wide emergency fund that would be used to prop up banks when national governments are unable to intervene.
Ms Merkel said that Germany could not and would not issue a blank cheque for all banks, “regardless of whether they behave in a responsible manner or not”.
Amid the confusion and bickering between governments, France denied at first that it had put forward a proposal for a fund at all and then, after admitting that it had done so, denied that it would cost ¤300 billion. Paris said that the figure had come from the Dutch Government. Officials in The Hague said that they had no idea what the French were talking about.
Mr Brown is expected to announce his new crisis committee today or tomorrow at the same time as his reshuffle to replace Ruth Kelly, the Transport Secretary, who has asked to step down. Ed Miliband, one of Mr Brown’s key lieutenants, could be promoted. There is still a question mark hanging over Alistair Darling’s future as Chancellor.