Will there be mass bailout of European banks?

 

Eurozone debt crisis sparks fears for Dexia bank

There are some European regulators and politicians who regard the downgrade of Italy and the woes of the Franco-Belgian bank Dexia as positive events (oh yes) - because they hope that these serious but containable shocks will speed eurozone governments into taking credible, evasive action ahead of more devastating shocks.

And there were signs from yesterday's Ecofin meeting that European finance ministers increasingly recognise the need to strengthen European banks, so that the banks can better absorb losses on loans to European nations with excessive debts.

It would be the bucket of sand to chuck on the fires raging in European banking markets, as Europe's sovereign debt crisis continues its metamorphosis into a pernicious banking crisis.

Olli Rehn, the European commissioner for economic affairs, told the Financial Times that "capital positions of European banks must be reinforced" and he talked of a "concerted coordinated approach".

But there is a problem. In July, most European banks - including Dexia - were given a clean bill of health in comprehensive stress tests.

So it is not clear how European ministers would force the banks perceived by creditors and investors to be weak - especially those in France and Italy - to raise expensive new capital.

A new round of more rigorous stress tests could take time that the eurozone just doesn't have - and it would make a mockery of those very recent stress tests, which would be harmful for the credibility of European regulators.

For what it's worth, what British regulators tell me they would like to see is the kind of so-called TARP rescue programme that worked pretty well in the US in the autumn 2008 - where massive amounts of capital were injected by the US government into almost every US bank, very much on a precautionary basis.

The attraction of that approach for budget-stretched eurozone members would be that the US ended up making a fat profit on its bank rescue programme, from the gains it made on selling bank stakes when some kind of equanimity returned to markets.

So will there be a eurozone TARP?

Well the revised European Financial Stability Facility (EFSF) has a mandate to engage in such rescues - or at least it will do, when the parliaments of all eurozone members ratify changes to the EFSF's modus operandi.

What is less clear is whether the EFSF has enough money for the job, given the other calls on its €440bn of firepower, and whether eurozone leaders have the collective will to use the EFSF for a mass programme of bank bailouts.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
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    Comment number 201.

    Re #200

    Euro may well suvrive January 1, 2012.

    However I'm not so sure it'll be still in circulation a year from now.

  • rate this
    +1

    Comment number 200.

    What odds are the London bookies giving on which day the Euro will implode and the markets collapse? Will it survive the end of October? Will the Euro see the light of day on January 1, 2012?

  • rate this
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    Comment number 199.

    People keep talking about bailouts, new money and so on. Where is all this money coming from? The present crisis is due to the system of fractional reserve banking. Basically lending money you don't have. And when Ben Bernanke, Federal Reserve Chairman, says (to Ron Paul) that he doesn't consider gold to be money, just an asset, I wonder what sort of asset he is to us.

  • rate this
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    Comment number 198.

    Robert, with your intelligence & privileged access to key 'insiders' whose views you regularly relay here, it is a shame you rarely call these same officials to account. If the argument against NOT propping up the banks is we all sink with them, some of your reporting should focus on how we uncouple ourselves from this train-wreck of a financial system. Down with banks & their apologists.

  • rate this
    0

    Comment number 197.

    173 JD - I fear you may also be confused. Fascist ideology is anti materialistic and it engages with big business only in a master setvant relationship. Fascists see businessmen big or small as decadent non entities. Fascism therefore has much in common with marxism as both are absolutist and see individuals as expendible pawns in the great sweep of history. Both are keen on militarism.

 

Comments 5 of 201

 

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