Thursday, September 25, 2008

Chronicles Of Depression 2.0: #241: EuroZone

EU refuses bail-out package despite crisis fears
“The situation we face here in Europe is less acute and member states do not at this point consider that a US style plan is needed,” said Joaquin Almunia, the EU’s economics commissioner, in a tense session at the European Parliament.

“We didn’t have subprime mortgages. We do not have investment banks. In any case, it’s not up to the EU; it’s up to every one of the member states to decide whether they need to launch this kind of fiscal initiative.”

The comments fell far short of reassuring doubters that the EU system has the machinery to tackle a major financial crisis.

Daniel Gross, director of the Centre for European Policy Studies in Brussels, said euro-zone lenders are heavily exposed to the fall-out from the US credit crisis, describing the Paulson plan as a de facto rescue for the Euopean banking system.

It has emerged that French finance minster Christine Lagarde was one of those pleading with US Treasury Secretary Hank Paulson last week to bail out AIG, which had insured over $300bn of credit derivatives to European firms.

Mr Gross said Deutsche Bank deploys fifty times leverage and has liabilites of $2,000bn, equivalent to 80pc of Germany’s GDP. Fortis Bank has liabilities of 300pc of Belgian GDP. These dwarf the burden of any US bank on the US government balance sheet. He said EU states do not have the means to bail out these banks. Any rescue would have to come from the European Central Bank, yet it is not allowed to carry out bail-outs under the Maastricht Treaty law.

Emphasis added by me.

Those latter figures are just staggering. It's the first time I've heard of that. 300% of Belgium's GDP? And the Europeans dare to mock us, to call us greedy? And fifty times leverage -- from the Germans, whose public image is one of resolute austerity?!

Denmark looks bad:
Denmark is in full-fledged recession and has already suffered two embarrasing bank failures this summer as the bubble burst in commercial real estate.

The central bank seized Roskilde Bank in August in a $8bn bail-out after a deposit run by client in a Nordic version of the Northern Rock debacle, warning that the total collapse of the lender would pose a “significant threat to the financial stability of Denmark”.

It stepped in again this week to rescue EBH Bank with a state guarantee, and has pushed shotgun marriages for two other distressed lenders, Lokalbanken and Forstaedernes.

Stein Bocian, chief economist at Danske Bank, said the banks had lent heavily to developers in high-risk projects, relying on short-term funding in the capital markets. The game ended when the credit window jammed shut.

“Short-term funding has become extremely expensive and now they can’t roll over their loans,” he said.

Emphasis added by me.

Bank failures. And credit starvation. Were the projects being financed actually bad or worthless? Or did they get trapped by bad timing in the credit market?

More about Denmark
Denmark has enjoyed a blistering credit boom over recent years, fuelled by membership of Europe’s Exchange Rate Mechanism which fixed the Dranish krona to the euro.

The policy caused the country to import the monetary policy of the ECB at a time when it was far too loose for Danish needs. Interest rates were just 2pc until the end of 2005. The result was to push household debt to 260pc of GDP, the highest level in the world. This compares to 135pc in America.

Denmark’s housing bubble is now popping with the same destructive effect as bubbles in the US, Britain, Ireland, Spain, and indeed China. Danish prices have dropped 4pc so far nationwide on official data, but estate agents say properties are now off at least 20pc in parts of Copenhagen.

Emphasis added by me.

Those household debt figures make me feel better about my fellow Americans. Maybe we're not the pigs we're portrayed to be when compared to others in the world!

Usually, I love reading the Comments after an Evans-Pritchard column. But either the debate got so heated over there or the Telegraph's Comment system is so buggy, that it's impossible to read any Comments. It seems each one is duplicated three or even four times!

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