Friday

15th Dec 2017

Europe scrambles to save banking system

  • Banking stocks took a major hit across Europe after news the US bailout had failed (Photo: wikipedia)

European authorities in Brussels, Frankfurt and at EU member state level are scrambling to save the continent's financial system after bank stocks plunged when US lawmakers rejected a $700 billion bailout of Wall Street on Monday (29 September).

Banks are petrified of lending to one another for more than one day, requiring central banks to flood their coffers with the money they need to stay in business.

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After yesterday's part-nationalisation of Belgo-Dutch banking giant Fortis and the nationalisation of the UK's Bradford & Bingley, Belgium-based Dexia, the biggest provider of lending to local governments in the world, could be the next financial institution to be rescued by taxpayers.

In an email from Belgian Prime Minister Yves Leterme, the country's federal government reached an agreement with Belgium's regional assemblies to jointly support the bank, Bloomberg News reported.

Even French President Nicolas Sarkozy has joined the rescue operation, despite the bank being headquartered in Belgium, issuing directions that the state investment body Caisse Des Depots offer Dexia funds.

Elsewhere, the German government backed by a series of private banks bailed out collapsing mortgage lender Hypo Real Estate reportedly to the tune of €35 billion, according to the German Ministry of Finance.

The list of nationalisations is rapidly growing, with Iceland - not an EU member state - also nationalising the country's third largest bank, Glitner. The government has taken out a 75 percent stake in the firm in return for €600 million.

The Icelandic bailout is a larger per capita rescue operation than even the failed US $700 billion plan, representing some €2,000 for every Icelander. Following the move, the Icelandic Krona dropped to its lowest level ever against the euro.

Russia's Prime Minister, Vladimir Putin, has rushed to the forefront in the crisis, announcing authorities will offer domestic banks a fresh $50 billion atop the $120 billion already supplied.

In perhaps the most frightening development, banks have deposited some €28 billion with the European Central Bank, afraid of leaving it stashed anywhere else, according to reports in the UK's Daily Telegraph, quoting Hans Redeker, currency chief at France's BNP Paribas.

"The ECB is no longer able to inject liquidity because the money is just coming back to them again," the British paper quotes the banker as saying.

Bank stocks plunge

Meanwhile, European bank stocks dropped through the floor on Monday, with Germany's Aareal and Commerzbank particularly badly knocked down, taking a 42 percent and 22 percent hit to share prices. Ireland's Anglo-Irish Bank was down 46 percent and Allied Irish down 16 percent.

Italy's Unicredit, Sweden's Swedbank and France's Natixis all took a bruising as well, while a host of smaller banks in Denmark are set to collapse, according to the Financial Times. Spanish operations too are struggling.

On Monday, the European Banking Federation tried to reassure citizens that the financial sector was on a sound footing despite the crisis, and that depositors' savings were not at risk.

"The global economy is facing an unprecedented crisis which is generating a certain degree of anguish due to the financial failure of some major banks," the EBF said in a press statement.

"The European banking system will weather the storm," the statement read, adding: "In EU countries retail deposits are insured."

EU timetable

French President Nicolas Sarkozy will meet bank and insurance company directors on Tuesday to assess the financial sector's situation in his country, his office announced.

European Commission President Jose Manuel Barroso also said that a "structural European response" was currently being prepared for the summit of European leaders in two weeks' time.

Additionally, on Wednesday, EU internal market commissioner Charlie McCreevy is to unveil a tripartite reform of European banks' capital requirements.

Analysis

EU mulls post-Brexit balance of euro and non-eurozone states

Brexit will dramatically change the balance between EU members states that have the euro and those that don't. The thinking on the future of the eurozone is done at EU-27 level - but opposing camps will have to be reconciled.

Facebook to shift ad revenue away from Ireland

Public pressure about low corporate taxes appear to have pressured Facebook to launch plans to stop routing international ad sales through its Dublin-based headquarters in Ireland.

Commission wants more centralised eurozone by 2019

EU leaders will discuss at their summit next week the commission's proposals, which include a European Monetary Fund and an EU finance minister - but no eurozone budget, as proposed by French president Emmanuel Macron.

Facebook to shift ad revenue away from Ireland

Public pressure about low corporate taxes appear to have pressured Facebook to launch plans to stop routing international ad sales through its Dublin-based headquarters in Ireland.

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