After vacillating for months on Northern Rock before deciding to nationalise, this time Gordon Brown has impressed with his swift actions. After abrupt drops in the share prices of RBS and HBOS on October 7th, Brown announced a three-part plan to relieve the economy.
The Treasury will offer £50bn to banks in exchange for shares; the Bank of England will double the size of its liquidity program, stockpiling £200bn of Treasury bills for which banks can trade less liquid assets; and the Treasury will back £250bn of new funding obtained by banks.
The government also raised the limit on its protection of retail deposits from £35,000 to £50,000 and moved to secure deposits at Icesave, a British branch of a failed Icelandic bank. The government later stated that it would also extend further funding totalling £37bn to RBS and the merged HBOS/Lloyds TSB.
On October 13th, the German cabinet unveiled a €500bn economic rescue plan: a €100bn market stabilisation fund and up to €400bn in credit guarantees. The guarantees are designed to calm the fears banks have of lending to each other, which is one of the key problems perpetuating the crisis.
The fund will allow the government to buy assets directly from banks. But recipient banks will be subject to government oversight over management decisions, perhaps including a €500,000 ceiling on executive pay and a ban on large bonuses.
Also on the 13th, France announced a €360bn plan comprised of €320bn in credit guarantees on interbank loans and €40bn set aside within a state-owned company to aid bank recapitalisation. France had already taken action last week, guaranteeing the debt of Dexia SA, the world’s largest lender to local governments.
In addition, French banks may profit from the crisis: BNP Paribas, has recently agreed to buy the stricken Belgo-Dutch bank Fortis for €14.5bn. President Sarkozy has called for the easing of accountancy rules and for salary caps at banks, and has led in the efforts to coordinate European bailouts. At a Eurozone meeting in Paris, Sarkozy echoed Gordon Brown in warning that ‘the greatest risk is inertia.’
Iceland’s top three banks – Kaupthing, Landsbanki, and Glitnir – began experiencing financial troubles as early as 2004. Since 1991, the government had been dismantling the historic system of high taxes, high tariffs, and centralised price-setting. The result was economic expansion – easier credit, soaring stock and housing prices – plus a wave of overseas buyouts backed by foreign banks – including Barclays and Deutsche Bank.
Yet because so much of the Icelandic banks’ funding came from overseas lenders, they were vulnerable to changes in interest rates, exchange rates, and lender stability. In 2007, Kaupthing took steps to reduce its exposure to the risks of borrowing from the credit market: cutting costs, selling assets, and avoiding new acquisitions.
But the credit crunch still left the banks unable to secure further funding and burdened with $61 billion in debts, almost 12 times the size of Iceland’s economy. Therefore, Iceland has nationalised the big three banks. This has led to conflict with the UK, whose institutions, including local councils, had £800m of deposits in the Icelandic banks.
Iceland and the UK have come to an agreement over redeeming the deposits, but are still threatening to sue each other over their respective roles in the bank failures. The Icelandic stock exchange halted trading for a time but has reopened.
Spain was the third country to launch a bailout on Monday, guaranteeing up to €100bn of debt issued in 2008 and perhaps early 2009. Prime Minister Zapatero also revealed a measure allowing the state to buy shares in banks if necessary, though this has not happened yet.
Spain had already created a €30-€50bn fund to buy assets from Spanish banks and to provide capital for continued lending. Cautious regulation from the Bank of Spain limited the crisis’ regional impact, but easier borrowing since the 2002 introduction of the euro still led to a tripling in house prices and an overuse of debt. Mortgage rates, inflation, and unemployment have risen.
Yet, as in France, some Spanish banks still in good health have taken advantage of the situation; Banco Santander, the biggest bank in the EU, has agreed to buy all ofUS bank Sovereign Bancorp.
Italy’s financial plan resembles that of France; it includes guarantees on new bank loans with maturities of up to five years, asset-swapping measures to help recapitalisation, and insurance of loans to private companies. However, the government, unlike its European counterparts, has not set a specific figure for the cost involved.
Prime Minister Berlusconi claimed on Sunday that Italian banks have less to fear than their European peers and that UniCredit SpA, one of Italy’s biggest banks, is the only bank to require direct government aid. UniCredit has is exposed to more foreign risk than any other Italian bank. The government had passed an emergency plan the previous week, purchasing stakes in banks needing extra capital and extending a guarantee on bank deposits.