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THE FINANCIAL CRISIS : EUROPE

Facing up to the downturn

Consensus on bailout is elusive

October 08, 2008|Henry Chu and Sebastian Rotella | Times Staff Writers

LONDON — The 27 finance ministers of the European Union agreed Tuesday to increase the amount of bank deposits insured by governments. But more extensive coordinated steps to address the spreading economic crisis remained elusive, and Britain launched its own plan to shore up its ailing banks.

Before the markets opened here early today, Alistair Darling, Britain's chancellor of the exchequer, unveiled a $348-billion liquidity fund that would be made available for banks' day-to-day operations and offered a separate cash infusion of as much as $87 billion to keep banks afloat, in exchange for special shares in those banks that could turn a profit for taxpayers if the banks recover.

Britain's unilateral action comes as a growing chorus of critics is chastising European leaders for reacting sluggishly and haphazardly to the financial turmoil that necessitated government intervention to try to save five European banks last week alone. They say officials have wasted time blaming the U.S., and the so-called Anglo-Saxon model of rapacious capitalism, for their woes.

"The business model that has created this did come in large part from the U.S. and London," said Francois Heisbourg, a French political scientist who leads the council of the International Institute of Strategic Studies here. "It was perceived at first as an Anglo-Saxon crisis. But it is a global crisis now. I don't think it is a very different model. We are afflicted by the same plague."

In fact, recent events suggest that risky speculation, unwise lending and lax oversight have become entrenched on this side of the Atlantic as well. The initial denial and belated diagnosis have made it harder to find a cure, said Marc Touati, director of Global Equities in Paris.

"In Europe the problem is that we've been repeating over and over that we were not affected," Touati said. "Economy or finance is a matter of anticipating. Therefore when you don't anticipate, and react once the problem has emerged, it's much too late. That's what is happening in Europe these days."

The finance ministers tried to soothe panicked citizens Tuesday, focusing in particular on reaffirming public trust in a hard-hit banking system. Stock markets in London and Paris closed up slightly Tuesday after steep drops the day before.

But the ministers have been haunted by disarray and discord. Last week, Ireland unilaterally pledged to guarantee deposits in its banks, angering other EU members but sparking a rush to follow suit by countries including Greece, Germany, Sweden and Denmark.

In addition, Spanish leaders have complained of being excluded from a hastily called summit Saturday in Paris that brought together France, Britain, Germany and Italy but achieved little.

Then there are structural rifts between Britain, which maintains the pound sterling, and countries that use the Euro currency, as well as tensions dividing juggernaut economies on the west from emerging ones on the east.

Tuesday's announcement on bank deposit insurance hinted that consensus remained more goal than reality.

"Several member states have recently increased the level of coverage of national deposit guarantee schemes," the finance ministers said. "We agreed that all member states would, for an initial period of at least one year, provide deposit guarantee protection for individuals for an amount of at least 50,000 euros, acknowledging that many member states determine to raise their minimum to 100,000 euros. We welcome the intention of the [European] Commission to bring forward urgently an appropriate proposal to promote convergence of deposit guarantee schemes."

Some analysts said the focus on bank deposits was diverting attention from a more profound structural problem: the deep involvement of some European banks in the American subprime mortgage market and in high-risk, high-return lending.

"People talked about initially that Europe hadn't been part of that culture, but what we're seeing now has cast doubt on that. European banks have certainly been leveraged up," said Charles Davis, an economist at the Center for Business and Economic Research in London.

The IKB Deutsche Industriebank, based in Dusseldorf, Germany, seems an emblematic case. The bank had to be bailed out this year to the tune of more than $13 billion. Investigations found that the failed bank had set up an aggressive investment arm registered offshore in Ireland, which was heavily exposed to the American subprime mortgage market. When those subprime mortgage securities tanked, so did the investment body and then, by extension, IKB.

"You could see on the balance sheet of IKB that there were loans given to this [investment arm], but at the same time, the public -- and this includes analysts as well as investors -- did not pay too much attention to that," said Joerg Rocholl, associate professor at the European School of Management and Technology in Berlin.

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