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| NOW A SPANISH ASSET: Bradford and Bingley, a British lender, sold its retail branches to a Spanish bank Monday, while its
mortgage loans were bought by the British government. Kristy Wigglesworth/AP |
Europe pushed to produce its own rescue plans
Three major lenders were rescued on Monday as the global credit crisis spread.
from the September 30, 2008 edition
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09.29.08
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Pat Murphy talks with
Monitor correspondent Mark Rice-Oxley about Europe's reaction to the proposed US financial bailout plan.
Britain cobbled together a deal for Bradford and Bingley, its leading buy-to-let mortgage provider. Its 197 retail branches will be sold to Spanish banking giant Santander, while the British government will take over its loans at a cost of £41 billion (roughly $80 billion) to the taxpayer.
Iceland, Denmark, and Russia all arranged smaller bank rescues of their own, while Germany orchestrated a 35-billion-euro loan for Munich-based lender Hypo Real Estate. Trading in shares of UniCredit, an Italian bank, were suspended.
European banks are suffering from the twin factors hitting US counterparts: the toxic subprime loans that were sold worldwide and are leaving large holes in balance sheets, and secondly, no one can borrow their way out of trouble because no one will lend cash when they don't know who is about to go bust next.
Loss of customer confidence, such as that which hit Britain's Bradford and Bingley and Northern Rock bank before it, merely compounds the woes.
On Monday, investors again rushed for the safety of US Treasury bills – rather than corporate stocks and bonds – while banks charged more to lend to one another. When European and US central banks do pump cash into the system – as they have in recent days – banks are hoarding the funds rather than lending them out. Those are indications that fear is still gripping the banking system.
Europeans often say that their socially-oriented capitalism is more genteel and less cavalier than its profit-obsessed US counterpart. But analysts suggest that these will not be the last European finance houses to tumble.
Mr. Urquhart Stewart says that while Europe hasn't had the same housing boom and bust that America experienced, its economy is slowing, and numerous banks have been penalized by the double whammy of a global liquidity crunch and bad loans.
"A lot of institutions have been tempted towards investment banking, like Fortis, because of the profits you could apparently make over a short period of time," he says. "There probably are some other Fortises out there. I wouldn't be surprised if there was a French bank suffering. I fear I can see a plume of smoke rising over Paris."
Mr. Lenhoff says it might be asking too much to expect a concerted European response. After all, Mr. Bush and US Treasury Secretary Henry Paulson had to deal with only two political parties. Multiply that by the 27 countries of the European Union, and throw in the ponderous European Central Bank (ECB) as well, and decisive action may be harder to achieve, he says.
"Maybe the governments, along with the ECB, will have to launch something very similar, but I imagine that would be harder, not just because we have diverse countries, but because of a central bank less willing to respond like the Federal Reserve has," Lenhoff says.
David Owen, eurozone chief economist for Dresdner Kleinwort, a European investment bank, says Europeans are reluctant to emulate the Paulson plan, but adds that the ad hoc resolution for Fortis was encouraging. "The move with Fortis illustrates that they are able to move quickly to part nationalize a bank across three countries; the market should take some comfort from that," he says.
Whatever the magnitude and frequency of the bailouts required, the overall impact on the economy is likely to be severe. Mr. Owen points to a recent IMF working paper which studied 42 other systemic banking crises over the past four decades. The two principal conclusions: that failing financial institutions almost always require the taxpayer to bail out the banker, and that the knock-on effect is, as Owen puts it, "an output loss, as credit is restrained in the wider economy."
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