Britannia Radio

CONSERVATIVE HOME - Centre Right   6.10.08
Dangerous times – especially for the euro   
    by Ruth Lea

The current meltdown in the markets is quite terrifying. Trust 
between banks has collapsed and inter-bank lending has all but 
collapsed as fears of insolvency of counter-parties prevent banks 
from lending to each other. And it is concerns over solvency, not 
liquidity, which is the driving force behind the current, vicious 
twist in the banking crisis. Surely, it can only be a matter of days 
before the British Government steps in, directly injecting capital, 
to help re-capitalise our High Street banks in order to stabilise the 
banking sector. Forget moral hazard, forget ballooning public sector 
debt. Desperate times call for desperate measures. And these are 
desperate and dangerous times.

Whatever the criticisms of the US authorities and whatever the 
criticisms of the British authorities at least both countries have 
the institutions that are charged with tackling the banking crisis. 
The US Treasury and the Fed can concentrate on the travails of the US 
banking system and here in Britain the Treasury and the Bank of 
England can concentrate on the British banking system.

This is not the case in the Euro Area, where, yes, you have a central 
bank which can push emergency funds into the money markets and set 
interest rates but in other ways lacks the institutions to deal with 
a severe banking crisis in a coordinated and coherent fashion. In the 
rush to set up monetary union in the 1990s not nearly enough thought 
was given to the necessary political institutions that are required 
to maintain the euro’s long-term viability. All went well with the 
euro whilst the global economies thrived and the financial systems 
were not stretched. Just how the euro will fair now that we are 
facing the biggest banking crisis since the late 1920s is a different 
matter.

The omens do not look good. Both the Irish and the Greek governments 
when faced with crises of confidence in their banking sectors simply, 
and unilaterally, announced 100% guarantees for bank deposits. “Every 
man for himself” and blow the concept of European unity. And they 
really cannot be blamed. The Irish and Greek governments have to deal 
with their own national problems and are accountable to their own 
national electorates. If, as looks all too horrendously likely, the 
economic and financial situations deteriorate further the euro could 
come under very severe pressure indeed.

It should be remembered that no major currency union has survived 
without political union. In times of crisis national priorities take 
over from supra-national ones. There is no reason to believe that the 
Euro Area is fundamentally different from its predecessors. The Euro 
Area either pushes ahead and builds the appropriate institutions to 
shore up the currency’s long-term survival prospects, or it faces 
collapse
========================
[The following stands EU law on its head!   Those countries that have 
stuck to the law find theur stance weakened by so many others taking 
no notice of the law at all.  Now the Commissioner has joined them 
thus putting the EU’s cohesion at risk but - even more - making the 
very foundations of the Euro itself look extremely shaky -cs]

EU OBSERVER   7.10.08
EU endorses bank deposit guarantees
    RENATA GOLDIROVA

  BRUSSELS - The 27 EU leaders have vowed to "take all measures 
necessary" to ensure the stability of the ailing financial system.

According to a statement issued by EU French presidency on Monday 
evening (6 October), EU governments will not hesitate - if needed - 
to inject liquidity from central banks, to adopt measures targeted at 
certain banks or to enhance deposit guarantees.

"No depositor in the banks of our countries has suffered losses and 
we will continue to take the necessary measures to protect the system 
and depositors," reads the political declaration on behalf of all 
European leaders.
In addition, they once again pledged "close co-ordination and co-
operation" as they deal with the domestic effects of the ongoing crisis.

However, thus far, the words of solidarity have yet to be translated 
into deeds.

The Irish government was the first to take concrete steps towards 
blanket guarantees last week. Since then, Greece, Germany, Austria, 
Denmark, Sweden and the UK have all acted unilaterally in also 
promising full or significantly higher deposit guarantees.

EU solution
Ms Kroes has some concerns about the Irish bank guarantee, but 
otherwise, such a move is an appropriate response to the crisis
"My preference would be by far an EU solution," EU competition 
commission Neelie Kroes told the European Parliament on Monday (6 
October).
"That would be the best way to co-ordinate national actions and 
maximize their effectiveness, and at the same time, secure that 
negative spill-overs into other financial institutions and member 
states are limited."

According to Ms Kroes, it is "the very large scope" of the Irish 
guarantee and its discriminatory potential that have raised concerns 
- the scheme covers not only existing deposits and credit, but also 
all future credit to all six Irish banks.
"I'm confident with some fine tuning, the Irish guarantee scheme 
could be put in line with EU law," the commissioner concluded.

In general, the EU's fair competition watchdog took a softer stance 
towards other full bank deposit guarantees.
"The current financial crisis poses a systemic threat to EU banking 
sector ... and in this systematic context, general guarantees, 
protecting retail deposits and bank debts held by retail clients can 
be a legitimate component of the public policy response," she said.

Future clarity
The commission announced it would provide EU governments with 
"clarity and legal certainty" on the matter over the next few days.

According to Zsolt Darvas from the Brussels-based centrist think-tank 
Bruegel, the full guarantee should be only temporary solution.
"There is a fear that households will go to banks, take out their 
money and the bank will face not only liquidity, but also solvency 
problems," Mr Darvas said, adding that guaranteeing deposits could be 
a good solution because it could comfort bank clients.
"But in a long run, the authorities should develop regulations that 
would prevent such situations as we are facing now from happening 
again," the analyst concluded.

The issue - including amounts of guarantee and an impact on other EU 
states - will be debated on Tuesday (7 October) by all 27 EU finance 
ministers, EU economic and monetary affairs commissioner Joaquin 
Almunia said.