Monday, October 6, 2008

Europe’s flight to bail-out

Europe’s central governments are in panic mode – trying to guarantee or nationalize as much as they can separately before the massive global banking system actually crumbles (if it ever does). But unlike the U.S., Europe is having a difficult time agreeing on the (if any) bailout plan, and each of Europe's sovereign governments are attempting to save their own necks. However, since much of Europe is joined by a common currency (the euro), the recovery of each country depends on the strength of the sum. Business Week does a nice job listing Europe’s flight to bailout over the weekend:
“In Berlin, the German government held crisis talks after the collapse of a ballyhooed euro35 billion (US$48.4 billion) bailout of Hypo Real Estate AG, the country's second biggest property lender.”

“In Iceland -- particularly hard-hit by the credit crunch -- government officials and banking chiefs were discussing a possible rescue plan for the country's overstretched commercial banks.”

Belgian Prime Minister Yves Leterme said he aims to find a new owner for troubled bank Fortis NV to restore confidence in the company before the opening of markets on Monday.”... “The bank's Dutch operations were nationalized amid fears they could go insolvent.”

“On Saturday, the leaders of Germany, France, Britain and Italy met to discuss the growing meltdown which has leapfrogged across the Atlantic from the U.S. to Europe, but shied away from the massive US$700 billion (euro506 billion) bailout passed by the U.S. Congress a day earlier that President Bush signed into law.

While Europe's four largest economies pledged to coordinate national responses to help banks in distress, their failure to agree an EU-wide plan showcased the divisions in Europe on how to deal with the crisis.

France had suggested a multibillion-euro (multibillion-dollar) EU-wide government bailout plan, but backed off after Germany said banks must find their own way out.”
In some sense, Europe has a more challenging road toward a banking recovery – with it’s common currency – than does the U.S.’s perfect customs union (the 50 States). Many Western Euopean countries and their banking systems are joined by the EMU’s euro, and therefore, each banking system’s recover depends on a Europian-wide bailout plan, rather than a feeble sovereign attempt. You think that our Congress was bad? I would like to be a fly on the wall when leaders from Germany, France, and Englad convene to discuss varying bailout measures.

So while Europe bickers over the merits of a banking bailout, the euro is going to continue its decline. The U.S. $700 billion package – with its swath of problems and risks – looks great compared to Ireland’s lone blanket guarantee. Unless every country in the EMU and Western Europe agree on a plan to tackle their banking crises jointly – which is not likely in the immediate future – the unease in Europe will continue to grow. I agree with Brad Sester: The recent strength in the dollar is not a flight to quality, but “rather a flight away from risk.”

Rebecca Wilder


  1. Man, I didn't think anything could make us look good.

  2. This bailout is just one more example of the indivisible handjob stroking irresponsible CEOs and CFOs with billions so that they can run the American economy even further into the ground. So much for Keynesian economics. If the goal is to stimulate the economy, why not give the money directly to the American taxpayer? We'd do twice as much good for the economy by giving even half as much directly to the taxpayers. A bird in the hand is worth two in the bush administration.

  3. Hi John,

    "If the goal is to stimulate the economy, why not give the money directly to the American taxpayer?"

    I would agree if the goal of TARP (that is what you are referring to, correct) was to stimulate the economy - give it back to the taxpayers. But the goal was to raise investor confidence, and so the banking system needs to be calmed. But so far, the plan has not had the intended effect (with the DOW falling well below 9000).

    However, don't be surprised if some sort of fiscal stimulus comes our way. If we're raising $700 billion that we can't pay back, why not sell $100 billion more? Or even $200 billion?


    "I didn't think anything could make us look good."

    No, it doesn't make us look good - it just makes us look "not as bad."

    Thanks for reading, Rebecca

  4. I said: (with the DOW falling well below 9000).

    But I meant: (with the DOW falling well below 10000)!!!!!