Greece Scuttles €300 Billion Rescue Plan, Guarantees Bank Deposits

Yet another subject of worry is whether the global financial crisis will fracture the EU fatally. While the ECB coordinated rescue of Fortis was a positive sign, Ireland’s move to guarantee all bank deposits was a blow, since it is drawing funds from EU institutions to Irish ones. French president Sarkozy had proposed a 300 billion euro rescue program (an idea that seemed to elicit more surprise than enthusiasm), but that idea was effectively deep-sixed by Greece’s announcement today that, following Ireland, it too was providing a blanket deposit guarantee.

From the Times Online. I’ve left much of the detail in because it shows how hard it is for governments to respond in market time:

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…..

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….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….

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….

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.

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  1. Anonymous

    At some point, at least the American media is going to have to be a lot clearer about the EU and the eurozone, and stop using the British press for its main information source.

    Read the article – the problem with the Irish announcement was that it is threatening the non-euro, non-ECB affiliated British banking system.

    The EU already functions with a number of currencies (the pound comes to mind), and the EU is not based on the euro.

    Generally, the British media has been reporting on the imminent demise of the EU for generations. And some point, I’m sure that will come to pass, in the same way that all political systems come to an end.

    Americans, generally unable to read any language except English, appear to believe the British press simply because it is accessible, not because it is accurate.

    London is staring at catastrophe as the last major British industry, that of financial engineering, is on the verge of being wiped out. The EU is staring at a number of major problems, but the odds of it shattering based on currency problems is more British wish fulfillment than reality.

    Which is not to dismiss the uncertainty surrounding a number of aspects of the euro’s future by any means. But to the extent that the ECB is merely a renamed Bundesbank, it will continue to follow the same policies that were successful in Germany, still the world’s largest exporter – that is, steadfast in fighting inflation in the face of any and all political pressure, and accepting that the weak and unhealthy parts of the economy need to be pruned to allow the healthy parts to flourish.

    Obviously, Germany isn’t the rest of Europe, but France’s franc forte policy before its entry into the EMU was successfully modelled on Bundesbank German policy.

    And considering how Germany has retained its manufacturing economy compared to the UK, I’m pretty sure that the ECB will continue to ignore the advice coming from London, not to mention that of the U.S., the world’s largest importer.

    This doesn’t mean that the ECB is making the right choices (it is quite possible that none of the choices available are the right ones), or that everything will be fine in the future. What it does mean is that the ECB can see what hasn’t worked, and not follow the same policies. To the seeming outrage of those that won’t benefit from it.

  2. a

    Well said anonymous. IMHO the biggest threat to euro unity was a usd/eur rate at 2.0. That moment seems to have passed.

    And I don’t know who is assuaged by guarantees by the Irish and Greek governments, since both of these could go bust (just like Orange County).

  3. Richard Kline

    So Anon of 3:17 AM, I completely agree with every point you make, to the degree that I could have written that comment myself. UK exceptionalism rested on the nugget of the City—and nothing else. No it rests on less than nothing. The UK wants a bailout? Go and ask the ECB for what they will approve. Politely; and quickly. Or freeze in the dark.

    This crisis is _at least_ as likely to weld the financial arrangements of the EU more tightly together than to split them apart. Just where, pray tell, are Spain, Italy, Ireland, and the UK _going_ to go to fund themselves back on their feet if not closer to home? Coordination is the last best hope. Getting Sarko’s ego under control and small enough that it doesn’t keep pushing his mouth open is a small and temporary impediment to a Unity Solution.

    Oh BTW for those not watching, the ECB didn’t ease. With all the panic money screaming into US Treasuries, we have distortions in the currency markets tugging the euro down relatively, but this isn’t on fundamentals. I suggest that we watch the EU and what it does. As Anon of 3:17 says, there may be _no_ feasible interventionary solution. . . . In which case, doing as little as possible and keeping ones funds dry is the best course. Which is what the EU is, mostly, doing. And when we do the historical respective on this, my perspective is that the performance of the EU in this crisis will lap the field, easily. They, at least, are somewhat less swept up into short-termism.

  4. EvilHenryPaulson

    The proposal was dead when yesterday morning I read in both Le Monde and Le Figaro zealous denials of a plan ever existing. Merkel would not consider it and it was impossible with them.

    In any event, Barclays, Lloyds(/HBOS) and other British banks of questionable capital should produce some monumental news. There’s a good chance of the Brits coming to the ECB on both knees before things return to normal

    This 2000 paper from the NY Fed analyzes bank failures with respect to capital ratios . . . and I thought a 50-60:1 leverage ratio (Barclays over the last year) was bad news by itself

  5. Anonymous

    Haven’t heard from China lately. I read they are the next great hope, economy wise, I think they are just as vulnerable when they have no one to sell to. They seem to be just as backwards as the isolationists they were thousands of years ago.

  6. bg

    My reading of this site is that the US bailout of AIG saved goldman and the EMU, and that the europeans have no tools at their disposal comperable to what the US has.

    Does that mean that the europeans are counting on us to prop up the worlds banking system? And if we are the only hope, do we have any choice?

    Is this the reason we are putting a palliative on instead of recapitalizing? Because we do not want to be on the hook for the entire world?

  7. Ancient Brit

    How correct the above posters are about the British position.
    The economic policies of “Dear Old Blighty” have been as short sighted, if not as brazenly irresponsible, as those of the U.S.
    Our politicians have been singing the praises of derugulation, bragging about our financial “sophistication” and lecturing the continentals for years.
    The bulk of the British press has been unrelentigly anti-european usually, and in many cases deliberately, failing to distinguish the good from the bad in the continental way of doing things. This this has had its effect on British public opinion.
    Yes we are more prepared to share militry burdens (some were foolish I agree)than most, but not all, of the continental countries.
    However in economic matters time will show we have been anything but clever.
    We are about to get our comeuppance.

  8. EvilHenryPaulson

    What concerns me most about Britain is that in the last decade or two they success has been due in part to:
    > oil
    > consumption buoyed by housing sector
    > virtually unregulated financial sector but very lucrative — so much so, they have the arrogance to use "The City" as a proper name
    > capital inflows due to generous tax structure for foreigners (related to above point, also see Indian Sultans, Russian Oligarchs)
    During that time there have been deficits without associated long term investments in the country

    Now all the tail winds may become headwinds at a time the government may need to swing to a big deficit to maintain existing program spending. Essentially there does not appear to have been saving in the good times for a rainy day.

    Other countries should look into insuring MM funds. The necessary premiums for $152bn is assets is only $40mn and that's from a AAA+ counterparty. For those playing along at home, the insurance premium is a whopping 0.02631578947368% and I don't think the Treasury is charging them that monthly basis, even though they are probably insuring the worst $152bn in MM funds out there (source: Fed reserve + Treasury Oct 1 report)

  9. Richard Kline

    Actually, Anon of 3:42, China was _expansionist_ “thousands of years ago.” But don’t let any engagement with the facts impinge upon your perspective, since you haven’t to this point.

  10. Charles Butler

    The unwieldiness of the EU/EMU structure when it comes to issues that require common action but which action treads on national turf often requires that the member most affected by the problem take unilateral action that has negative effects on the remainder. The most recent example was the 2005 regularization of 400,000 illegal immigrants by the Spanish government.

    The situation which brought about this action, and the very vociferous complaints of EU countries (seeing as legal is legal everywhere) was the refusal of the EU to participate in the policing of Mediterranean frontiers with North Africa. Spain, being the closest entry point across the Straits of Gibraltar or through Melilla and Ceuta was saddled with the bulk of surveillance and later, management and repatriation. They correctly claimed that it was a European, and not national problem.

    The ploy worked and Brussels now participates. That’s how stuff gets done in the EU.

    As an aside, and with respect to yesterday’s Evans-Pritchard episode, smart money would bet on Great Britain in the EMU before Italy out.

  11. Chris

    Commodities and commodity trading would need to be included in this view, I think.

    When the “sterling balances” were run down after the first OPEC shock, during the Carter administration, and the then Labor government of Jim Callaghan, oil trading moved to London in a new way to offset the loss of what Harold Wilson had earlier called “invisible earnings”.

    London’s role in the world of the de-regulated “new finance” has grown from those humble origins, and been given some zip by privatization proceeds. BIS reports on derivative growth and activity by kind of activity and market document this extensively.

    There is a relation between commodity, currency, rate swap and other markets. A huge proportion of global activity of this sort is in London, where US and EU ECB players have been able to go, freed from domestic regulatory constraint (the Gramms and energy trading).

    An alternative to depreciating dollars is under public discussion in places people don’t often look, like Russian magazines. Currency basket type arrangements based on long term commodity supply agreements.

    These currency basket type things include gold as an accounting element.

    This type of arrangement can work in parallel with a collapsing dollar, and probably escape the notice of people who only read Brit newspapers like the Telegraph.

    To look at who needs long term assured energy supplies, who has the sources, and whose income is undermined by depreciating dollars is probably to decide to pay attention to Russia’s ongoing negotiations with OPEC (the two are meeting this month, and there will be a meeting of a “Gas-pec” next month, and also with Germany, in a different way.

    The British way of life as a “middle-man” based on “invisible earnings” piggy-backed on the dollar, its assets and its military support will not survive in its present form.

    The global oil, metal and soft commodity producing companies, often shared between UK and NL, will perhaps be interesting indicators of the emergence of a different kind of middle ground.

    It is not easy to see how that would fit with “Mittel Europa” given the issue of Russia and fuel supply, and the history.

    All these issues, I believe, indicate that politics and strategy need to be brought back into the calculus of thinking about the economy and finance. These are not local issues, but global ones working through locally developed institutional arrangements.

  12. Matt Dubuque

    Yves made the constructive comment in her recent video segment for the Atlantic magazine that the Treasury and Federal regulatory authorities needed a comprehensive framework with which to deal with these various crises on something other than an ad hoc basis.

    While I think that there are legitimate counterarguments (such as the lengthy CRMPG process) demonstrating that the Feds have not been COMPLETELY asleep at the wheel, I find the following quote of Yves from this piece upon which we are commenting, to be noteworthy:

    “…it shows how hard it is for governments to respond in market time.”

    I agree. It is very difficult.

    But where was their plan to prepare for this in advance?

    Again, Trichet and the Europeans seem to get the kid glove treatment from all commentators, for reasons unclear to me.

    Where was their plan? Were they too busy snickering at our problems stateside?

    Matt Dubuque

  13. Anonymous

    What are the costs of insuring all EU deposits? It seems that Ireland and Greece did the right thing but that the big EU powers want to support their fantasy bonds. As we have seen the investment sector fold into the commercial, we have also seen that deposits anchor these bloated valuations and the general economy. So deposit insurance stabilizes the system from the bottom up, a fact lost on the US as a shadow bank run starts to drain the 40% of uninsured deposits.

    I agree with the posters about the British dilemma. Berlin seems more in tune with Moscow than London. The City and “bullshit Britain” are screwed. The end of Atlanticism?

  14. Chris

    I think it is a beginning not an end. I think this whole story with AIG is a reworking of an old story. We all seem to be in this together, for better or worse, richer or poorer. The costs and unforeseen consequences of accidents, mishaps and mistakes are quite dramatic, and not clearly reversible without some unified (agreed consensus) on what to do.

    Perhaps it would be possible to negotiate new monetary arrangements based on technology to replace the fuels we burn, and medium to long term commodity agreements, where the development and assimilation of the new technologies was meshed with the rundown of non-renewables. (This needs to involve US, EUR, Russia, China, India, Brazil, Mexico, OPec in some form)

    Such an approach would provide investment potential and job creation. The latter two would “buy ” political and economic time for dealing with the financial issues.

    All that would be required would be a little bit less insistence on the virtues of free markets and financial engineering on one side, a little less of Festung Europa protectionist bloc on the other, and a bit more openness to the long term interests of others, rather than short term pursuit of what seems to be best for self.

    A noble purpose for mankind. Any takers?

  15. Anonymous

    If I might offer an observation:

    The credit market is dying, but no one has the courgage to pull the plug. This is the result not of too little credit – which could be fixed – but too much credit – which cannot be fixed.

    Let it go…

    We are seeing the late results not of economic failure, but of economic success – the transition of our human family from organization on the basis of scarcity, to organization on the basis of abundance. All the indicators formerly taken as predictors of the health of the economy have been turned on their head. As such, all steps being taken to prolong the existing order will only make the transition more difficult and painful.

    The important thing at this moment is to sweep the credit market aside: abrogate by law all personal and public, foreign and domestic debt obligations. The houses that were built with it will not disappear, neither will the factories and farms produced by it.

    What will happen instead is that they will be saved from being plowed under as they were in the 1930s to stabilize prices – as the so-called toxic assets are being plowed under with this bailout plan.

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