UK: Financial System Close to Collapse; Italy Breaks on "Weak" G7 Draft

England, which has been more candid in talking about the financial crisis than other countries (the governor of the Bank of England has said, for instance, that living standards will fall) issued a blunt assessment earlier today. The scary update is that even overnight lending is starting to break down.

From the Financial Times:

UK authorities insisted on Friday that action, not words, was needed from this weekend’s meeting of the group of seven leading economies if there was to be any hope of saving the world financial system from collapse.

As financial markets stared at the abyss, the UK delegation to the meeting sought to raise the stakes in an effort to avoid a mere agreement on a set of broad principles.

Describing a world in which wholesale money markets were now refusing to lend to banks, even overnight, the UK authorities warned that the world was on the edge of a collapse of the financial system.

They insisted that a bold and clear commitment to action to should replace general principles for individual country actions.

Alistair Darling, chancellor of the exchequer, insisted that it was crucial that the G7 countries showed that they could act collectively.

”We need a clear commitment today. It is a real test of international institutions that we actually sign up to doing things rather than a piece of process,” Mr Darling said.

The UK does not believe that every country should follow its specific proposals, but they are insisting that all of them must announce measures to demonstrate that they agree on the provision of unlimited liquidity; a plan to strengthen financial institutions, including a huge recapitalisation of banks; and emergency measures for wholesale money markets, which Mr Darling said would ”enable banks to start lending to each other”.

There were indications on Friday that Germany was taking steps in this direction, after the Die Welt newspaper reported that Berlin was working on a UK-style rescue plan for its financial sector which could involve guarantees of more than €100bn ($137.2bn) and a large capital injection.

Reuters quoted a German finance ministry spokesman as saying that no decisions of this kind had been taken and that the government was observing the effectiveness of measures already taken.

However, the news agency also quoted a source from Germany’s ruling coalition who said said the report was not wrong.

Mr Darling declined to speculate on what would happen if the G7 did not deliver, but insisted that the only solution to the current crisis was bold government action on an internationally co-ordinated basis.

However, despite the urgent need for coordinated action, the G7 appears to be trying to tiptoe around the crisis rather than admitting to its severity. From Bloomberg:
Finance ministers and central bankers from the Group of Seven nations met for crisis talks in Washington amid an unprecedented public split over what to say in their joint statement.

The draft communique under consideration is “too weak” and fails to reflect the gravity of the financial turmoil, Italian Finance Minister Giulio Tremonti told reporters in Washington before the talks began. “We won’t sign it.”

While Britain has pushed for a coordinated agreement to guarantee loans between banks, one official from a G-7 member said it was unlikely the G-7 would endorse their proposal. Two European officials said earlier that the group was considering saying that no systemically important bank would be allowed to fail, and laying out principles for all nations to follow.

G-7 economic leaders “have never released a statement that they have not reached consensus on,” said Jenilee Guebert, senior researcher at the G-8 Research Group at the University of Toronto. “It would be unique. At this stage, however, for him to be saying this doesn’t necessarily mean it will transpire.”

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  1. Anonymous

    Heh … I commented this morning about Bretton Woods II dying before our eyes. Italy’s PM Berlusconi is on the same wavelength, according to Bloomberg:

    Oct. 10 (Bloomberg) — Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world’s financial markets while they “rewrite the rules of international finance.” Berlusconi didn’t give any details about what kind of rules leaders were looking to change, except to say that leaders are “talking about a new Bretton Woods.”

    How will Bretton Woods III differ from the busted Version II? Obviously, the US dollar can’t expect a unique status as the anointed reserve currency. Politically, the question will be how to spin the dollar’s demotion as a benefit. “More credit” will be the seductive promise.

    An “emergency bill” to create a global central bank probably is already written. Now we just need a market crash and bank holiday to panic the Congressional sheep into passing it, unread.

    All roads lead to inflation. Bretton Woods III will be as botched as the last one … just on a larger scale.

    — Juan Falcone

  2. Yves Smith


    With all due respect, the headline of this Telegraph article is “Standard of living will fall, warns Mervyn King.” The body of the article cite statements that support the formulation used in the headline.

    And the organization he supervises is called the Bank of England. But I will try to watch my usage in the future.

  3. RebelEconomist

    The headline is misleading; what Merv actually said was “The higher level of energy and food prices is a genuine reduction in our standard of living relative to where it would otherwise have been”. Both central bankers and journalists behaving in character!

  4. Anonymous

    The poor Brit's are toast! They have had the HBOS & B&B's as reckless as an 18 year old with a bottle of Jack Daniels and the car keys. I pity the price discovery that awaits them and their precious houses. Only the Irish will get whacked harder.

  5. Richard Kline

    *Arrghh* Merkel is an inveterate footdragger. If Sarko and Putin take either arm and Trichet pushes from behind they _may_ just get her to the starting line on this one. . . . But who’s left to put a boot up Paulson’s fundament to get him to the same place? Especially when he has men in dark suits from GS and JPM in a scrum around him at all times as a bodyguard of liars?

    I will be AMAZED if the Eight Horsemen manage to issue a substantive, signed-on plan by 0800, Monday 13 Oct 08. We need it, but they aren’t up to it. More likely, someone like the Strauss-Kahn of the IMF will be trotted out to read a proposed document which the Eight then have to return to sell to their domestic constituencies. By which time, the ex-ibanks will have collapsed the financial economy into themselves.

    This is how one gets communism rather than socialism, folks: Gross public displays of greed, incompetence, and sociopathy by the ‘dealership’ leads the proles to defend themselves openly, too. If one gets depression from recession due to incompetence (not exactly, but that’s a commonplace formulation), one gets totalitarianism from emergency in the same way. It’s not a given, the conditions have to be shaped for it. The sight of the overclass clutching our children to their pudgy selves as human shields while shooting at each other is a shaping event. All those ancien regime aristocracies who got mobbed to death: It was ugly, but they bought their ticket in the queue on merit. Mmmphh.

  6. Chris

    Please excuse: with the present leadership of the US, no self respecting government should commit tax payers resources to dealing with something as non-defined as a “global crisis.” Not excluding the existence of non-self-respecting governments of course.

    The black hole is dark and deep, and has been quite capable of swallowing anything pushed in its direction, so far over the last 18 months. (Nearly $4 trillion, if you include legislative stuff, and $2,719 trillion if you just take the Fed’s own initiatives). (And the biggest estimate of the real estate related problem of the banks is $1.4 trillion, isn’t it?)

    So Merkel should be applauded for backbone and smarts. Bush won’t talk to her on the phone anymore. Merkel is defending tax payers everywhere. She should be supported.

    Could the US budget deficit hit $1.5 trillion plus in FY 2009 or even $2 trillion plus? (438+880+300+?). The expected reduction in the trade deficit should help a bit, shouldn’t it?

    The black hole that needs to be plugged up may not just be the banks anymore, but the insatiable appetite of the Treasury and the Federal Reserve for new sources of funding for ever new initiatives to support the system. That’s probably what they want from Europe, new money, much better than recycled government debt from China.

  7. Richmond Rambler

    This may be a bit of an aside, but while living in Rome I was amazed at the way banks were viewed by average people. Not a lot of trust there, and really quite comically excessive security at each and every bank (surrendering your bags/purse at the door; entering one by one through special enforced doors). Surely a Nani Moretti spoof about it exists…

    There’s a joke about going to the mattresses somewhere in all this.

  8. Glen

    Is it me or was the G7 draft just a really nice statement of intent? I’m yet to read anything of substance.

  9. Anonymous

    Sounds like inflation to me.

    The infamous Hypertiger would say, with a factional reserve compounding interest banking system the only way to continue, is to inflate more than the previous inflation. Brentwood II was one such continuation play.

    Without imploding first then coming up with the same plan to start all over again I don’t see any way to reinflate above the previous inflation. You need another bubble (even larger than the RE bubble) to throw money at to create demand for central banks to satisfy.

    If they can’t get consumers to spend, the central banks are toast. Doesn’t mean they won’t try.

    (China watching from the sidelines just wants their money, paid in full)

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