Financial Contagion Spreads in Europe
European nations scrambled on Sunday night to prevent a growing credit crisis from bringing down major banks and alarming savers as troubles in financial markets spread around the world, accelerating economic downturns on three continents.
The German government moved to guarantee all private savings accounts in the country on Sunday, hoping to reassure depositors who had grown nervous as efforts to bail out a large German lender and a major European financial company failed.
Late Sunday, it was disclosed that new bailouts had been arranged for both of those companies, Hypo Real Estate, the German lender, and Fortis, a large banking and insurance company based in Belgium but active across much of the Continent.
The spreading worries came days after the United States Congress approved a $700 billion bailout package that officials had hoped would calm financial markets globally.
The moves came as federal regulators were trying to help resolve a merger fight in the United States that could make investors more uneasy. Court hearings were under way in New York on Sunday over competing efforts by Citigroup and Wells Fargo to acquire Wachovia , a large bank that nearly failed a week ago.
In Europe, meanwhile, the crisis appears to be the most serious one to face the Continent since a common currency, the euro, was created in 1999. Jean Pisani-Ferry, director of the Bruegel research group in Brussels, said Europe confronted “our first real financial crisis, and it’s not just any crisis. It’s a big one.”
The European Central Bank has aggressively lent money to banks as the crisis has grown. It had resisted lowering interest rates, but signaled on Thursday that it might cut rates soon. The extra money, aimed at ensuring that banks would have adequate access to cash, has not reassured savers or investors, and European stock markets have performed even worse than the American markets.
In Iceland, government officials and banking chiefs were discussing a possible rescue plan for the country's commercial banks. In Berlin, Chancellor Angela Merkel and her finance minister, Peer Steinbrück, appeared before television cameras to promise that all bank deposits would be protected, although it was not clear whether legislation would be needed to make that promise good.
Mindful of the rising public anger at the use of public money to buttress the business of high-earning bankers, Mrs. Merkel promised a day of reckoning for them as well. “We are also saying that those who engaged in irresponsible behavior will be held responsible,” she said. “The government will ensure that. We owe it to taxpayers.”
Stock markets fell sharply in early trading on Monday in Asia on growing fears about the health of European banks and the resilience of the global economy.
The Nikkei 225 index dropped 3.4 percent in Tokyo on Monday, the Kospi index in Seoul fell 3.7 percent and the Standard and Poor’s/Australian Stock Exchange 200 index in Sydney declined 3.3 percent. The events in Berlin and Brussels underscored the failure of Europe’s case-by-case approach to restoring confidence in the Continent’s increasingly jittery banking sector. A European summit meeting Saturday did little to calm worries.
President Nicolas Sarkozy of France and his counterparts from Germany, Britain and Italy vowed to prevent a Lehman-like bankruptcy in Europe but they did not offer an American-style bailout package.
The crisis has underlined the difficulty of taking concerted action in Europe because its economies are far more integrated than its governing structures.
“We are not a political federation,” Jean-Claude Trichet, the president of the European Central Bank, said. “We do not have a federal budget.”
Last week, Ireland moved to guarantee both deposits and other liabilities at six major banks. There was grumbling in London and Berlin about the move giving those banks an unfair advantage. But Germany proposed its deposit guarantee Sunday after Britain raised its guarantee to £50,000, or almost $90,000, from £35,000.
Unlike in the United States, where deposits are fully guaranteed up to a limit of $250,000 — a figure that was raised from $100,000 last week — deposits in most European countries have been only partially guaranteed, sometimes by groups of banks rather than governments. In Germany, the first 90 percent of deposits up to 20,000 euros, or about $27,000, was guaranteed.
The Paris meeting produced a promise that European leaders would work together to halt the financial crisis and reassure nervous investors, but even before the meeting began it was becoming clear that two bailouts announced the week before had not succeeded and that a major Italian bank might be in trouble. That bank, Unicredit, announced plans on Sunday to raise as much as 6.6 billion euros, or $9 billion, in capital.
Fortis, which only a week ago received 11.2 billion euros from the governments of the Netherlands, Belgium and Luxembourg, was unable to continue its operations. On Friday, the Dutch government seized its operations in that country, and Sunday night the Belgian government helped to arrange for BNP-Paribas, the French bank, to take over what was left of the company.
In Berlin, the government arranged a week ago for major banks to lend 35 billion euros to Hypo, but that fell apart when the banks concluded that more money would be needed. Late Sunday, the government said a 50 billion euro package had been arranged, with the government and other banks participating.
The credit crisis began in the United States, a fact that has led European politicians to claim superiority for their country’s financial systems, in contrast to what Silvio Berlusconi, Italy’s prime minister, called the “speculative capitalism” of the United States. On Saturday, Gordon Brown, the British prime minister, said the crisis “has come from America,” and Mr. Berlusconi bemoaned the lack of business ethics that had been exposed by the crisis.
Many of the European banks’ problems have stemmed from bad loans in Europe, and Fortis got into trouble in part by borrowing money to make a major acquisition. But activities in the United States have played a role. Bankers said Sunday that the additional need for funds at Hypo came from newly discovered guarantees it had issued to back American municipal bonds that it had sold to investors.
The credit market worries came on top of heightening concerns about economic growth in Europe and the United States. Many economists think there are recessions in both areas, and one also appears to have started in Japan, where the Nikkei newspaper reported Monday that a poll of corporate executives found that 94 percent thought the country’s economy was deteriorating.
“Unless there is a material easing of credit conditions,” said Bob Elliott of Bridgewater Associates, an American money management firm, after the retail sales figures were announced, “it is unlikely that demand will turn around soon.”
Almost unnoticed as the United States Congress approved a $700 billion bailout for banks last week, it also agreed to guarantee $25 billion in loans for America’s troubled automakers. European automakers said Sunday they would seek similar aid from the European Commission.
Henry M. Paulson Jr., the United States Treasury secretary, hoped that approval of the American bailout, which will involve buying securities from banks at more than their current market value, would free up credit by making cash available for banks to lend and by reassuring participants in the credit markets.
But that did not happen last week. Instead, credit grew more expensive and harder to get as investors became more skittish about buying commercial paper, essentially short-term loans to companies. Rates on such loans rose so fast that some feared the market could essentially close, leaving it to already-stressed banks to provide short-term corporate loans.
Altria , the parent company of the cigarette maker Philip Morris, said lenders wanted it to delay its planned $10.3 billion acquisition of UST, another tobacco maker, until 2009, but promised it would complete the deal.
Europe’s need to scramble is in part the legacy of a decision to establish the euro, which 15 countries now use, but not follow up with a parallel system of cross-border regulation and oversight of private banks.
“First we had economic integration, then we had monetary integration,” said Sylvester Eijffinger, a member of the monetary expert panel advising the European parliament. “But we never developed the parallel political and regulatory integration that would allow us to face a crisis like the one we are facing today,” he added.
In Brussels, Daniel Gros, director of the Center for European Policy Studies, agreed. “Maybe they will be shocked into thinking more strategically instead of running behind events,” he said. “The later you come, the higher the bill.”
While the European Central Bank has power over interest rates and broader monetary policy, it was never granted parallel oversight of private banks, leaving that task to dozens of regulators across the Continent.
This patchwork system includes national central banks in each of the euro-zone’s 15 members and they still retain broad powers within their own borders, further complicating any regional approach to problem-solving.
The European economic landscape today bears little resemblance to the 1990s, when the groundwork for the euro was laid. Back then, Mr. Pisani-Ferry recalled, few banks in Europe had cross-border operations on a significant scale.
A wave of mergers over the last decade created giants like HSBC and Deutsche Bank, which straddle continents and have major American exposure.
“The European banking landscape was transformed fairly recently,” Mr. Pisani-Ferry said. “When the euro was first introduced, the question of cross-border regulation didn’t really arise.”
Optimists say one potential long-term benefit from the current turmoil is that it often takes a crisis to propel European integration forward.
“Progress in Europe is usually the result of a crisis,” Mr. Eijffinger said. “This could be one of those rare moments in E.U. history.”