Europe is in for a rude awakening

The Europeans have no idea what is about to hit them. Their banking system is collapsing and European politicians are fighting amongst themselves. At French President Nicolas Sarkozy’s crisis summit, the politicians were unable to craft a comprehensive or wide-reaching response to deal with the banking crisis. Meanwhile, the carnage in European banking is increasing.

Within the last week alone, four banks (Dexia, Fortis, Glitnir and Bradford & Bingley) were nationalised and the Irish and Greek governments were forced to offer blanket guarantees to depositors. Now Hypo Real Estate is on the verge of collapse and the Bundesbank is warning that the result, due to its interconnectedness in German Finance, would be financial Armageddon. Moreover, European banks are even less well-capitalised than U.S. banks.

Do the politicians not see the urgency? The Europeans had better solve this problem or they are going to be in a world of hurt.

European leaders pledged to bail out their own nations’ banks while stopping short of a regional rescue effort to deal with the global credit crisis.

At a summit in Paris yesterday, leaders of France, Germany, Britain, Italy, Luxembourg, the European Central Bank and the European Commission agreed to ease accounting rules, seek tougher financial regulations and weaken enforcement of competition and budget laws.

“Each government will act according to its own methods and its own means but in a coordinated manner with the other European states,” French President Nicolas Sarkozy, who called the meeting, told reporters.

The gathering came a day after U.S. lawmakers approved a $700 billion bank-rescue package and as Europe’s own initial bailout efforts began to unravel. Germany’s Hypo Real Estate Holding AG said a government-backed 35 billion-euro ($49 billion) deal collapsed yesterday when banks withdrew their support. Belgian authorities worked to shore up Fortis after the lender received an 11.2 billion-euro lifeline on Sept. 28.

Europe “is still a dwarf compared to the U.S.” in terms of willingness to spend, said Laurence Boone, an economist at Barclays Capital in Paris. The statement on supporting banks “is not a progress. It’s the same as before the summit.”

The failure to forge a consensus approach to shore up banks roiled by soaring borrowing costs reflects the divisions in the 27-nation bloc. Germany criticized a plan floated by French Finance Minister Christine Lagarde to set up a rescue fund. A chorus of opposition greeted Ireland’s decision to guarantee its banks’ deposits and debts.

`Collective Action’

Hours before the summit, Dominique Strauss-Kahn, managing director of the International Monetary Fund, met Sarkozy to press the need for agreement. “Collective action is even more necessary in Europe than in the U.S. because Europe is more complex than the U.S.,” he told reporters. “Action must be taken quickly and in a concerted manner.”

German Chancellor Angela Merkel‘s opposition underscored the hurdles to forging a unified front. “Each country must take its responsibilities at a national level,” she told a joint press conference after the summit.

The government leaders did agree on policy recommendations for the European Commission and for a global summit they’re seeking to deal with the credit crisis.

They said they would seek to harmonize guarantees of deposit levels in the wake of the Irish move. The U.K. bank regulator increased its insurance ceiling to 50,000 pounds ($88,500) per account from 35,000 pounds to stem a flow of funds to Ireland.

`Global Summit’

Their joint statement called for a global summit “as soon as possible” to implement “a real and complete reform of the international financial system.”

Sarkozy said that “all actors” must be supervised, including rating firms and hedge funds. Executive-pay systems must also be reviewed, he said.

“We want a new world to come out of this,” Sarkozy said. “We want to set up the basis for a capitalism of entrepreneurs, not speculators.”

Anticipating increased spending, declining tax revenue, and government bank takeovers, they called for “greater flexibility” in the application of European Union competition and budget rules.

European finance ministers last month pledged to keep their budget deficits below 3 percent of gross domestic product even as the economic slowdown dented tax receipts and boosted welfare payments.

Accounting Rules

The leaders said they want to allow banks to keep some assets valued as if they’d be held until maturity, instead of having to review their value each quarter.

“That’s to stop the down-spiral of assets’ value,” Barclays’ Boone said. “That’s the closest thing the commission can do to what the Americans do.”

They also said they want to change accounting rules that require banks to review their holdings each quarter and report losses when the values decline, the so-called mark-to-market standard. Banks worldwide have written down $587.7 billion since last year, according to data compiled by Bloomberg.

With their economies headed into recession, European leaders said the European Investment Bank will lend 30 billion euros to support small and medium-size companies that may struggle to find cash.

Related posts
Crisis in Europe: an article I wrote in today’s Guardian
Europe is next
European banking collapse including nationalisation of three banks
Bradford & Bingley may suffer Northern Rock’s fate
Germany: banking system collapse possible due to Hypo Real Estate
Ireland guarantees bank deposits at six banks
Switzerland: politicians need to act now

European Union Leaders Stop Short of Regional Plan on Bailouts – Bloomberg

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