London — Europe was aghast – and impatient – at the US failure to approve a banking bailout plan, and credit remained tight. But reflecting the view that approval was inevitable, stock markets Tuesday didn't follow Wall Street's record plunge Monday.
Indeed, financial authorities in Europe are taking different measures than the US leadership to address the crisis, preferring to nationalize failing banks rather than sustain them with a plan to buy out their most toxic assets.
French, Belgian, and Luxembourg authorities rescued a second cross-border bank in two days, injecting $9 billion into Dexia. The bank is the world's biggest lender to local governments. That lifeline came just a day after the part-nationalization of Fortis in the Benelux countries and Bradford and Bingley in Britain.
"The way we do things in Europe will be different than in the US – and that's a good thing," says Philippe Martin, an economics professor at the Sorbonne in Paris. "It's moving towards the nationalization of banks, which is the right model.
"Some [European] banks will fail, but there won't be a Paulson plan for Europe," he adds. In the US, the taxpayer bears a significant portion of the risk. "Nationalization means we give you money, but we take the power. We fire the management, and when the situation gets better we sell the assets and the government makes a profit on some assets."
Nonetheless, the financial community in Europe is eager for the US to resurrect the bailout plan. Economists and investors expressed their frustration Tuesday, while leaders and financial authorities in Paris, London, Rome, and other centers huddled to ensure that the US inaction would not upend their own financial systems.
"There is anger and frustration and a complete lack of understanding for self-indulgent politicians who clearly live on another planet," says David Buik of Cantor Index, a commodities spread-betting firm in London. "We can't believe this for a minute, we hope and think it's just posturing. There has to be a deal after Jewish New Year."
European and Asian markets see-sawed as traders tried to work out whether the US rejection was temporary or not. "There is still some hope across the market that this bailout plan in the US will eventually be passed," says Keith Bowman, an analyst at Hargreaves Lansdown, a stock brokerage firm.
British Prime Minister Gordon Brown said the vote was "very disappointing" and said he'd told the White House as much, reminding the Bush administration "about the importance that we attach to taking decisive action in America."
The European Union spokesman, Johannes Laitenberger, told journalists that Europe "expects that the decision will go through soon.... The turmoil that we are facing has originated in the US; it's become a global problem. The US has a special responsibility in this situation."
Mr. Brown and French President Nicolas Sarkozy each met with their financial lieutenants and bank chiefs, and then sought to calm investors. Brown reiterated several times in one interview that he was taking "decisive action" to shore up stability; French bank chiefs said their system was "solid," despite alarms over Dexia. "We must stop collectively frightening ourselves," said France's central bank governor Christian Noyer.
But economists say that Europe is dependent on decisive US action. "It would be catastrophic if it [the US plan] is not resurrected," says Anne Sibert, professor of economics at University of London's Birkbeck College.
Willem Buiter, a former member of the Bank of England's monetary policy committee, wrote that hope remained that the US House of Representatives "will be frightened by its own audacity and will reverse itself."
If not, he said in a published commentary, bank lending would dry up, panic selling would ensue even of unblemished assets, household-name banks would collapse, and financial anarchy would ensue leading into "the Great Depression of the 2010s."
"My remaining financial wealth is now kept in a [small] old sock in an undisclosed location," he concluded.
Europeans are tentatively pushing for an international conference to address institutional reform and regulatory changes. Mr. Sarkozy has called for a summit to take place in November. Brown told the UN last week that there was a need for global oversight with "colleges" of regulators to keep tabs on the largest institutions.
Economists remain unsure that a multinational response can work, citing the US experience. "Any rescue plan is going to require sizable fiscal transfer and it's hard enough to do that within a single country," says Professor Sibert. "I can't see an international effort being effective."
"It's very difficult to regulate financial institutions," she adds. "One problem is that regulators aren't paid enough and don't have the incentives the employees of financial institutions do."
Professor Martin says a conference would do little in the short term, but "in the longer term, to try and avert such crises again we will need some minimal regulation for financial markets and sovereign funds."
Aside from rescuing banks, European monetary authorities have been pumping money into markets to help ease the liquidity crisis. They do this by lending money against collateral that can be in the form of questionable assets, freeing up the bank to swap bad debt for cold, hard cash.
Rym Ayadi, senior research fellow at the Centre for European Policy Studies in Brussels, says this is fine as far as it goes, but it's a drop in the ocean of what the market needs, and hardly a long-term solution.