Europe fights financial storm as bank deal collapses

Nicolas Sarkozy (C) flanked by Angela Merkel (L) and Gordon Brown

PARIS (AFP) – The leaders of Europe’s four main economic powers vowed to protect fragile banks in their fight against the global credit crisis as the biggest rescue in German financial history collapsed.

France, Germany, Britain and Italy put on a united front, promising a more coordinated approach to the credit crunch, although Germany’s Chancellor Angela Merkel insisted states would mainly act individually.

President Nicolas Sarkozy, who hosted Merkel and prime ministers Gordon Brown of Britain and Silvio Berlusconi of Italy, did not dispute this point, but said a new “doctrine” had been agreed.

Sarkozy said the four had agreed to punish failing bank executives and to call for a rapid meeting of the Group of Eight world industrialised powers to marshall a global response to the financial crisis.

“We have agreed to make a solemn engagement as heads of state and government to support banking and financial institutions faced with the crisis,” Sarkozy said at a joint news conference following the three-hour meeting.

“Each government will operate with its own methods and means, but in a coordinated manner. In a way, we have devised a doctrine,” he added.

Brown agreed: “Where action has to be taken we will continue to do whatever is necessary to preserve the stability of the financial system.”

“The message to families and businesses is that, as our central banks are already doing, liquidity will be assured in order to preserve confidence and stability,” he promised.

There was no public disagreement between the leaders, after a week in which officials in Paris and Berlin sparred in anonymous press briefings, but in Merkel emphasised countries’ individual reponsibilities.

“Each country must take its responsibilities at a national level,” she said.

Brown said after the meeting that leaders had agreed to ask for the early release of 32 billion euros in European funds to help small businesses weather the global finance crisis.

“This crisis that has come from America has affected all businesses, so we agreed to ask the European Investment Bank to frontload 25 billion pounds (44 billion dollars) of finance for small business loans,” Brown said.

Despite efforts to present a united front amid differences emerged over just how much public finance rules, enshrined in the Stability and Growth Pact, could be eased.

“The application of the Stability and Growth Pact should reflect the exceptional circumstances that we find ourselves in,” Sarkozy said.

The French leader has long sought more leeway on the European Union’s public finance rules, with France struggling to keep its deficit to less than three percent of output as required by the pact.

However, Germany, which is counting on wiping out its deficit entirely this year, has consistently resisted French calls for more wiggle room on public finances.

Luxembourg premier Jean-Claude Juncker, the chairman of eurozone finance ministers, insisted that leaders had agreed in Paris that the pact had to be respected “in its entirety” despite the financial crisis.

“We’re not going to let the deficits run up, that would be a bad policy,” Juncker said.

With tax revenues falling amid sharply slowing economic activity, public finances are coming under growing strain and raising fears that the three-percent deficit level will be increasingly difficult to respect.

Despite cracks in their unity over deficit rules, leaders agreed that the European Commission should show flexibility when it considers state aid decisions in the crisis-struck banking sector.

“In the current circumstances, we stress the need for the commission to continue to act quickly and apply flexibility in state aid decisions, continuing to uphold the principles of the single market,” they said.

The scale of the financial storm was brought home when, during the summit, the German bank Hypo Real Estate (HRE) announced that a planned 35-billion-euro (48-billion-dollar) buy-out had collapsed.

A consortium of banks was to have led the biggest rescue in German history and its failure could wreak havoc when financial markets reopen on Monday.

Germany’s Interior Minister Wolfgang Schaeuble has warned that the financial crisis could have political repercussions, noting how Adolf Hitler rose to power after the 1929 Wall Street crash.

“The consequences of that depression was Adolf Hitler and, indirectly, World War II and Auschwitz,” the minister was quoted as saying in Der Spiegel’s latest edition to appear Monday.

HRE said in a statement that it was “determining the consequences” after its suitors had “refused to provide liquidity lines”.

It was problems like those at HRE, the British banks Northern Rock and Bradford and Bingley, Dutch-Belgian giant Fortis and the Franco-Belgian Dexia that forced Sarkozy to call the mini summit in Paris.

The Belgian government was said to be considering totally nationalising the Belgian part of Fortis or selling assets to BNP Paribas of France. The Dutch government has nationalised Fortis’ Dutch assets.

French officials had this week floated the idea of a joint 300 billion euro (480 billion dollar) fund to bail out failing European banks, on the model of the 700 billion dollar package approved Friday by US President George W. Bush.

Germany and Britain shot this down, however, and there was no talk of such an idea at the Paris summit.

There was no disagreement, however, over the need for careless bankers to take their share of the blame for the credit crunch.

“In the case of a public support to a bank in distress, each member state present here has decided that those executives who failed will be sanctioned and the shareholders bear the weight of the intervention,” Sarkozy said.

Sarkozy also said bonus structures for top executives should be “revisited”.

Oct. 05, 2008

Source: The Telegraph

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