Financial crisis in Europe: the domino effect


At a summit in Paris last weekend, Angela Merkel, Nicolas Sarkozy, Gordon Brown and Silvio Berlusconi, Europe’s most powerful heads of state, quietly concluded that it will be every man for himself.

Various public interventions have suddenly sprung up across the continent since last Sunday: Iceland is in the process of drawing up a plan to shelter its banks; Britain’s Treasury Secretary is “meditating some major steps” to do the same; Spain and Portugal are working to guarantee all their bank deposits, the central bank of Sweden is increasing its loans to banks in the Nordic countries; Greece, Denmark, Ireland and Germany all offer to guarantee their bank deposits. “Each country seeks to protect its own businesses and interests. said Global Insight analyst Dragana Ignajatovic. It may even mean challenging their own principles: Barely two days after German Chancellor Angela Merkel criticized the Irish government for insuring all of its banks’ deposits, she was forced to do the same in Germany last Monday. Even anti-socialist EU competition commissioner Neelie Kroes also acknowledged on Monday that Ireland’s deposit guarantee scheme could be “tuned”. Just before, she had criticized this decision and said that she agreed with the criticisms of Germany, in terms of competition.

It is unlikely that Europe will be able to act in unity to save its troubled banks, at least not in the same way as Paulson’s $700 billion plan to save Wall Street. The European Union can neither raise taxes like the US Treasury can nor finance a decision to sell massive government bonds. Indeed, such a decision would be difficult because the main issuers – Germany, France and Great Britain – all have different yield curves. Massive bond issues would put these countries out of the league with regard to the Debt-GDP ratio, a criterion for EU stability. Will the decisions taken so far by governments be sufficient? If the intended effect was to lower interbank lending rates, then maybe. The London Interbank Offered Rate, or LIBOR, for a three-month interbank loan, fell last Monday for the first time in six sessions; relatively strong drop, too strong. But it’s only Monday, and several big countries, including Spain and Britain, have yet to reveal all of their big ideas. Bizarrely, the German finance minister said on Monday that case-by-case solutions may not be enough – Peer Steinbrueck, indeed announced on Monday that his officials are drawing up “a plan B” for Germany, which would not be not a Europe-wide plan. According to, reports were that Germany hadn’t really planned a “deposit cover” for all banks. The confusion persists. Some continue to believe that Europe is forgetting its key unifying force: the European Central Bank. Stephen Pope, strategist at Cantor Fitzgerald, thinks that “the best way to calm the markets is for the ECB to step in and act as a kind of clearing bank, or intermediary between lenders, to help maintain confidence in repayments. interbank loans. »

It might even be more effective than a rate cut, or the central bank’s current method of offering individual overnight loans to banks, or injecting liquidity. This has already lowered the JJ rate, making this market very liquid, and leaving the one to three month interbank market still in the grip of fear.

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