Thursday, September 25, 2008

Europe and Japan turn cold shoulder to U.S. plea for bank bailouts

International Herald Tribune
By Carter Dougherty and Matthew Saltmarsh
Monday, September 22, 2008

FRANKFURT: Europe and Japan on Monday turned a cold shoulder toward a U.S. request that they bail out banks in the manner now being proposed in the United States.

The German chancellor, Angela Merkel, also took the opportunity to sharply criticize the United States and Britain for opposing German attempts to put greater regulation, or at least reviews, of the financial sector on the international agenda last year, when she was chairing the Group of 7 industrialized nations.

"Everyone who produces a real product knows what it looks like and what standards it is up to," said Merkel, who was traveling in Austria. "One also needs to know with a financial product what's involved. Otherwise, these sorts of things happen that we then all have to pay for."

Following an overnight conference call of finance ministries and central banks, the G-7 industrialized nations welcomed the U.S. bailout program Monday and pledged in a statement to "enhance international cooperation." But the G-7 also indicated that countries were free to go their own way in grappling with what has become the worst financial crisis since the 1930s.

"Each of us remains committed to taking further action, individually and collectively as needed, consistent with our respective domestic circumstances," the G-7 statement said.

That appeared to paper over the obvious cracks between the United States and countries in Europe and Asia whose economies and banking systems are generally in far better shape than the United States. The U.S. Treasury secretary, Henry Paulson Jr., said Sunday that he would "aggressively" seek plans from other countries to buy up illiquid assets linked to the U.S. mortgage market.

German officials explicitly ruled out any German version of the U.S. plan, which is expected to cost American taxpayers about $700 billion.

British officials also made clear that they would not create a fund to buy up bad assets, although Alistair Darling, the chancellor of the Exchequer, did promise new rules.

"We are putting in place both here in the U.K. and internationally the tougher financial regulation no one can doubt we need," Darling told the governing Labour Party's annual conference in Manchester. "I will continue to do whatever it takes to maintain financial stability and I remain confident we will do so."

President Nicolas Sarkozy of France, who holds the rotating European Union presidency, is expected to elaborate on that message in a speech Thursday, French officials said. Sarkozy, who was in New York on Monday, has on many occasions complained about the structure of global economic regulation.

Christian de Boissieu, chairman of the French prime minister's council of economic analysis, said: "The U.S. must take charge of the budgetary costs of the crisis. I'm all for trans- Atlantic solidarity, but this doesn't include financing the bailout."

The Japanese finance minister, Bunmei Ibuki, said after the announcement that he saw no need for Japan to set up a U.S.-style rescue scheme to help its own banks offload bad assets, Reuters reported from Tokyo.

The German finance minister, Peer Steinbrück, said, "None of the other six G-7 members will adopt a similar program to the U.S."

Apart from a manifest lack of sympathy for a crisis they view as created by the U.S. banks and regulators, European governments are also constrained by rules within the 27-nation EU that limit budget deficits and public debt.

"Europe won't do anything because they haven't got the room for maneuver," said Jeremy Batstone-Carr, an equity strategist with Charles Stanley in London. "They ran themselves into a cul de sac."

Objectively, there is a certain truth in the European position.

An August study by the U.S. Federal Reserve concluded that losses of foreigners holding mortgage-backed securities could eventually be as low as $75 billion, though paper losses would be higher before the market stabilizes. Also, the German government has already pumped billions of euros into several hard-hit banks.

The Association of German Banks hinted that it would oppose the emerging U.S. bailout scheme if it gave U.S. competitors a sudden advantage.

"We need to assure that disadvantages for foreign institutions do not arise from the U.S. program," said Manfred Weber, executive director of the association. "It was, after all, American products that created the crisis and that created the contagion effects."

Weber also took a jab at U.S. regulators, saying that many European banks invested in the products, which "were covered by U.S. supervision."

A spokesman for the association, Heiner Herkenhoff, said the group was still studying the details of the U.S. plan, such as they were available, but that it should define eligibility through the nationality of the product. If the mortgage-linked security in question was from the United States, it should be eligible no matter who holds it.

That appears to conflict with the U.S. plan to limit eligibility to foreign banks with significant operations in the United States. Such a rule would include members of the German association like Deutsche Bank and Commerzbank, but many of its other 218 members do not meet that criterion, despite having invested in mortgage-backed securities from the United States, Herkenhoff said.

Matthew Saltmarsh reported from Paris. Julia Werdigier contributed reporting from London.

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