One troubling aspect of the banking crisis was that European banks, like their US peers, are at risk of failure, and some of them are sufficiently large that they are beyond the capacity of any one country to save. While Fortis was bailed out by three countries, ad hoc arrangements are risky. As Keynes said, “There’s many a slip ‘tween the cup and the lip,” yet another Lehman-scale failure could push the financial system into complete breakdown.
The Financial Times reports that the German government, in a reversal of their previous stance to have each government responsible for its own banks, has now reversed its position and is working on developing a plan for bank rescues. The FT article says the Germans will provide for equity injections into their own banks, parallel to the British plan announced last week. It suggests that Germans may also be relenting on joint action to save European banks (heretofore, the German stance was that each country was responsible for its own bank). Note that the plan details are still in flux.
If a new plan goes far enough, it would be very welcome news. Most observers regarded the G7 statement on Friday as empty and worried that concrete action was needed before the end of the weekend.
From the Financial Times:
The German government was last night drawing up a multi-billion euro contingency plan to shore up its banking system, which could see the state guarantee interbank lending in the country and inject capital in its largest banks.
The contingency draft, closely modelled on the British initiative announced this week, marks a dramatic political U-turn for Europe’s largest economy after Angela Merkel, chancellor, and Peer Steinbrück, finance minister, both ruled out a sector-wide state rescue for banks this week.
A senior government official said Ms Merkel and Mr Steinbrück would decide on Sunday which of the measures to implement after consultation with their European partners. Once a political decision was made, he said, the plan could be implemented in the following days.
“We are considering all the options at present to the exception of a massive state acquisition of toxic assets,” the official said. “Whatever we do will be done in close co-operation with our G7 and European partners.”
France announced last night that it was planning an emergency European Union summit tomorrow.
Speaking in Washington ahead of a meeting of Group of Seven finance ministers, Mr Steinbrück said the time had now come for “a systemic solution . . . I am convinced that case-by-case solutions are no longer helping. They are now exhausted.”
The official said Ms Merkel was in daily contact with Nicolas Sarkozy, French president, suggesting that the plan, if approved, could be launched as a joint initiative.
Ulrich Wilhelm, the government spokesman, said: “It is the duty of the federal government to be prepared and to review all options . . . As of now, no political decision has been made.”
Under the draft, Germany could issue a state guarantee for interbank lending worth more than €100bn and provide direct lending to the banking sector. Berlin is also contemplating offering several dozen billion euros of capital to the banks in exchange for equity and may take entire ownership of some institutions.
As an additional option, the government is considering extending the blanket guarantee it issued last Sunday for account deposits to money market funds, which have experienced a steep outflow of savings lately. Fund managers have had to divest considerable quantities of assets to cover the withdrawals.
Bankers said the interbank lending market in Germany had reached near-gridlock.