PARIS: Financial and political leaders held crisis meetings across the globe Sunday, urgently seeking agreement on measures to restore confidence to the teetering financial system before markets open Monday in Asia.
Government leaders from all the major European Union members gathered in Paris to discuss their collective response to the crisis after a similar meeting last week ended with only a patchwork of individual measures.
After Britain and the United States announced late last week that they would move to take ownership shares in ailing banks, the 15 leaders of the euro zone were looking for a collective response that will help avoid tit-for-tat actions by individual countries that might harm their neighbors.
Nicolas Sarkozy, the French president, said after a meeting at the Élysée Palace with the British prime minister, Gordon Brown, that he expected European countries to present an “ambitious and coordinated plan” that goes beyond measures announced by the Group of 7 in Washington on Friday.
The authorities in Australia and New Zealand on Sunday announced a blanket guarantee of bank deposits. Australia’s prime minister, Kevin Rudd, called the financial meltdown “the economic equivalent of a national security crisis” because of the danger that funds would flee Sydney banks for countries where governments had guaranteed deposits.
“I don’t want a first-class Australian bank discriminated against because some other foreign bank, which has a bad balance sheet, is being propped up by a guarantee by a foreign government,” Reuters quoted Rudd as saying.
In Washington, President George W. Bush held a Saturday morning meeting at the White House with G-7 finance ministers, who were in the city for the annual meetings of the International Monetary Fund and the World Bank.
“All of us recognize that this is a serious global crisis, and therefore requires a serious global response, for the good of our people,” Bush said afterward in the Rose Garden.
Bush said the countries had agreed to general principles to respond to the crisis, including working to prevent the collapse of important financial institutions and protecting the deposits of savers.
But the G-7 communiqué issued on Friday did not clearly detail what measures would be taken, suggesting that countries remained unable to agree on a common approach to shoring up their respective financial systems.
The Group of 20, which includes the world’s 20 richest nations, issued a statement in support of that communiqué late Saturday after Bush, Treasury Secretary Henry Paulson Jr. and the Federal Reserve chairman, Ben Bernanke, met with leaders of the group.
Credit markets have seized up in the last few weeks, making it difficult for most companies to borrow money on more than an overnight basis. Bank stocks have plummeted, meanwhile, making it much more difficult to shore up their balance sheets by raising more capital from investors.
German officials were working Sunday on the details of a plan to support banks and insurers – including direct capital injections. The government expects to publish some details later in the day, a German official said.
The turbulence of the past week moved Germany from advocating action on a case-by-case basis to support for a systemic solution for the country’s banks. So far Germany has rescued several banks and guaranteed deposits.
The shift in Berlin does not extend to contributing to a common fund that would support all European banks, largely because the government fears that German taxpayers would end up financing other countries’ banks. But Chancellor Angela Merkel said in an interview published on Sunday that Germany intended to put its sovereign guarantee behind the banking system.
“Only an act of the state can bring back the needed trust,” Merkel was quoted as saying by Bild am Sonntag.
Current plans are to have the package approved by the cabinet on Monday and rushed through the German Parliament this week.
With the U.S. bond market and all Japanese markets closed on Monday for holidays, British policy makers appeared to be speeding plans to inject capital into their troubled banks. At the top of the list is Royal Bank of Scotland, whose market value has fallen to below £12 billion pounds, or about $20 billion – less than the amount of capital it raised from private investors in June.
Royal Bank of Scotland is expected to need about that amount from the government, giving the Exchequer a majority stake. As much as £35 billion of the £50 billion that the government set aside for sick banks could be disbursed.
Other British banks that are likely to receive tax payer funds include HBOS, Lloyds TSB and Barclays. That these banks, which for weeks have been saying they did not need new funds from taxpayers, will now welcome the British government as one of their largest shareholders reflects of how deep the confidence crisis has become in Britain.
Late last week, Barclays had signaled that it might go to capital markets for the £3 billion it needs to bolster its tier-one ratio, a measure of financial strength. Such an initiative would take as much as 10 days, an eternity in today’s fear-stoked climate. And now Barclays, along with its peers, is preparing to take the direct, if not more humiliating, path by accepting public funds.
There was even talk of halting trading on world exchanges until the new measures are promulgated and digested by market participants.
Hans-Jörg Rudloff, the chairman of Barclays Capital, said closing world financial markets for two or three days might provide time needed to work out solutions to the global banking crisis, Bloomberg News reported, citing an interview with the Swiss newspaper Sonntag. In the interview, Rudloff called the crisis “probably worse” than the stock market crash of 1929. The Italian prime minister, Silvio Berlusconi, mused publicly about a market shutdown on Friday in Washington, but he later retracted his statement.
Faced with the growing intensity of the crisis, the Bush administration has embarked on an overhaul of its own strategy. Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the administration has put that idea aside in favor of an new approach that would have the government inject capital directly into banks in the United States – in effect, partly nationalizing the industry.
The U.S. Treasury Department’s surprising turnaround on the issue of buying stock in banks, which has now become its primary focus, has raised questions about whether the Bush administration squandered valuable time in trying to sell Congress on a plan that officials had failed to think through in advance. As recently as Sept. 23, senior officials had publicly derided proposals by Democrats to have the government take ownership stakes in banks.
It has also raised questions about whether the administration’s deep philosophical aversion to government ownership in private companies hindered its ability to look at all options for stabilizing the markets.
Some experts also contend that the Treasury’s decision last month not to use taxpayer money to save Lehman Brothers worsened a panic that metastasized into an international crisis.
The administration’s new focus was announced Friday as part of a rescue plan in coordination with six of the world’s richest nations. It came in a week when the Dow Jones industrial average plummeted 18 percent, one of the worst weeks in U.S. stock market history.
While the Treasury says it still plans to buy distressed assets, the scope of that plan is unclear. Paulson has refused to say whether the capital infusion program for banks would be bigger than the original plan to buy troubled assets.
The Treasury has urged Fannie Mae and Freddie Mac, the government-sponsored mortgage financing companies, to step up their purchases of hard-to-sell mortgage bonds in what could be a speedier and less formal process than the auctions proposed by the Treasury.
To some extent, the effort to agree on a coordinated plan is being driven less by the hope that such measures will carry more punch than by the fear that countries acting alone could destabilize the system.
Those worries grew in recent days when Iceland seized its three major banks, which were failing, and appeared to guarantee the deposits of Icelanders over those of foreigners. That provoked a fierce reaction from Britain, which is now in talks with Iceland to get back the deposits of British citizens.
With the United States and Europe working together on ways to secure their banking systems, economists are concerned that money may flow out of other countries, particularly emerging markets, if investors decide that those markets are not as safe.
The United States sought to reassure these countries in a meeting Saturday evening of the Group of 20, which includes countries with large emerging markets like China and Russia.
“We want to reaffirm, reinforce our commitment that we’re going to take these actions in a way that doesn’t undermine the economies of other countries,” said David McCormick, the U.S. Treasury’s under secretary for international affairs.
As recently as late September, the idea of letting the government buy part of the banking system was unthinkable in the Bush administration. To many officials, such intervention seemed like a European-style government intrusion in the markets.
“Some said we should just stick capital in the banks, take preferred stock in the banks,” Paulson told the U.S. Senate Banking Committee on Sept. 23. “That’s what you do when you have failure. This is about success.”
But on Friday, Paulson not only confirmed his intention to buy stakes in banks but also gave the idea central billing. “We can use the taxpayers’ money more effectively and efficiently, get more for the taxpayers’ dollar, if we develop a standardized program to buy equity in financial institutions,” he said.
Treasury officials said they hoped to make the first capital investments within the next two weeks. That would be earlier than any government purchases of unwanted mortgage-backed securities. One reason for Paulson’s rapid reconsideration was that global financial markets had been going downhill faster than anyone had seen before.
Katrin Bennhold contributed reporting from Paris, Landon Thomas Jr. from London, Carter Dougherty from Frankfurt, and Edmund L. Andrews and Mark Landler from Washington.
Article written by: David Jolly
International Herald Tribune
http://www.iht.com/articles/2008/10/12/business/imf.php
