Europe is coming into focus in the global financial crisis as EU member states scramble to ward off a financial meltdown following a series of bank bailouts as heavily exposed banks in Iceland are bringing that country close to national bankruptcy and sending shockwaves throughout the region where they have been operating widely.
“What you’ve been witnessing these past four frantic weeks is rapid systemic failure – a spectre that has only rarely materialised before,” Damien Reece of London’s The Daily Telegraph writes. “The Great Depression was certainly one of those times.”
According to the newspaper, there was little or no short or medium term cash left in the money markets on Monday or Tuesday beyond some very limited facilities and the day-to-day banking business was at severe risk of not being completed.
The escalating crisis forced UK prime minister Gordon Brown and chancellor Alistair Darling to hurriedly commit a massive ?500bn ($A1294bn) rescue package yesterday for its financial system, which did little to calm the markets as banking stocks dived following the announcement.
In an atmosphere where Brown said the market had ‘ceased to function’, the UK government committed up to £50bn of taxpayer funds for a partial nationalisation of struggling banks, using increased public borrowing but with political strings, including restricting executive pay.
In addition, the Bank of England will inject at least £200bn into the money markets through its existing Special Liquidity Scheme. Another £250bn will be available for banks over the next three years to guarantee medium-term debt to help restore confidence and encourage banks lending to each other again.
Darling had to commit further taxpayer funds to offer a blanket guarantee to retail depositors of Icesave and Heritage Bank, the UK banking operations of Landsbankinn – the Icelandic banking giant which was seized by the Icelandic government and declared insolvent yesterday – after customer panic when their accounts were suspended.
The British government had to resort to anti-terrorism powers to recoup some of the £4.6bn owing to Landsbankinn’s 300,000 UK account holders and intends to sue Iceland for the money, risking its relations with Iceland to dive to their lowest level since the 1970s ‘cod wars”.
Britain’s action comes amid sharp criticism of European leaders for being on the backfoot in its response to the global financial turmoil which required government intervention to bail out five European banks last week alone.
In all, it was a disastrous week as panic swept through the financial sector when stock markets plunged on Monday amid mounting concerns over the health of the banking systems, following a series of state bailouts and unco-ordinated action to guarantee banks’ deposits.
Ireland last week unilaterally pledged to guarantee its banks’ deposits, prompting Denmark, Germany, Greece and Sweden to follow suit.
A meeting of the leaders of Britain, Germany, France and Italy in over the weekend in Paris to formulate a European-wide response to the $US700bn ($A1046bn) US bailout package achieved little, and when 27 EU finance ministers met in Luxembourg on Tuesday the only agreement reached was to increase the guarantee on bank deposits to €50,000 ($A102,242), although some member states were determined to guarantee €100,000.
This discord within EU does not bode well for a unified response to the crisis and prompting analysts to warn the focus on bank deposits is diverting attention from a more fundamental structural problem which enabled some European banks’ to become deeply involvement in the US sub-prime mortgage market and in high-risk, high-return lending.
“The business model that has created this did come in large part from the US and London,” Francois Heisbourg, a French political scientist who leads the council of the International Institute of Strategic Studies in Paris, told the International Herald Tribune. “It was perceived at first as an Anglo-Saxon crisis. But it is a global crisis now. I don’t think it is a very different model. We are afflicted by the same plague.”