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Europe is not OK atm:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3075180/EU-refuses-bail-out-package-despite-crisis-fears.html
EU refuses bail-out package despite crisis fears
Europe rebuffs calls for fiscal rescue plan as German exports collapse and Nordic central banks firefight liquidity squeeze.
The European Union no plans “yet” for a rescue package along the lines of the Paulson plan despite severe stress in the region’s banking system and further evidence that the bloc is sliding into a deep and protracted recession.
“The situation we face here in Europe is less acute and member states do not at this point consider that a US style plan is needed,” said Joaquin Almunia, the EU’s economics commissioner, in a tense session at the European Parliament.
“We didn’t have subprime mortgages. We do not have investment banks. In any case, it’s not up to the EU; it’s up to every one of the member states to decide whether they need to launch this kind of fiscal initiative.”
The comments fell far short of reassuring doubters that the EU system has the machinery to tackle a major financial crisis.
Daniel Gross, director of the Centre for European Policy Studies in Brussels, said euro-zone lenders are heavily exposed to the fall-out from the US credit crisis, describing the Paulson plan as a de facto rescue for the Euopean banking system.
It has emerged that French finance minster Christine Lagarde was one of those pleading with US Treasury Secretary Hank Paulson last week to bail out AIG, which had insured over $300bn of credit derivatives to European firms.
Mr Gross said Deutsche Bank deploys fifty times leverage and has liabilites of $2,000bn, equivalent to 80pc of Germany’s GDP. Fortis Bank has liabilities of 300pc of Belgian GDP. These dwarf the burden of any US bank on the US government balance sheet. He said EU states do not have the means to bail out these banks. Any rescue would have to come from the European Central Bank, yet it is not allowed to carry out bail-outs under the Maastricht Treaty law.
The picture is clearly going from bad worse across the eurozone and the Nordic region. Germany’s IFO index of business expectations fell to 86.5 in September, the lowest level in fifteen years. “The time has come to cut interest rates,” said Gernot Nerb, the IFO’s chief economist.
“A full-blown recession is looming in the 2009 for the euro area,” said Jacques Cailloux, Europe economist at the Royal Bank of Scotland.
“We think Germany’s economy will contract next year. Foreign manufacturing orders have been falling for eight months in row, which is the longest continuous drop on record. German house prices have fallen 4pc this year, which is surprising for a country that has seen no increase for ten years,” he said.
“The country has a `high-beta’ to the global cycle because of its industrial exports. Given this macro-outlook, we think the ECB should cut rates,” he said.
Spain’s finance minister Pedro Solbes said on Wednesday that his country’s economy may faces outright contraction in the second half of the year, warning that debt arrears had become “very disturbing”.
Even oil-rich Norway is facing strains in its credit system as the mayhem goes global. The Norges Bank joined with the central banks of Sweden, Denmark and Australia in an emergency scheme to draw $30bn of US dollar funds in a swap accord with the Federal Reserve.
“There is now an unusually high degree of uncertainty linked to the turbulence in financial markets. The crisis in financial markets has deepened. In Norway there are also clear signs that economic growth is slowing,” it said.
The wild ructions in the Oslo, Stockholm, and Copenhagen credit markets are a fresh reminder that there is almost nowhere left to hide in world economy as the fall-out from the collapse of Lehman Brothers continues to wreak havoc.
Under the swap deal, the Fed is providing $5bn each to Norway and Denmark, and $10bn each to Sweden and Australia. It aims to assuage the frantic scramble for dollars by banks with exposure to US toxic debt.
Denmark is in full-fledged recession and has already suffered two embarrasing bank failures this summer as the bubble burst in commercial real estate.
The central bank seized Roskilde Bank in August in a $8bn bail-out after a deposit run by client in a Nordic version of the Northern Rock debacle, warning that the total collapse of the lender would pose a “significant threat to the financial stability of Denmark”.
It stepped in again this week to rescue EBH Bank with a state guarantee, and has pushed shotgun marriages for two other distressed lenders, Lokalbanken and Forstaedernes.
Stein Bocian, chief economist at Danske Bank, said the banks had lent heavily to developers in high-risk projects, relying on short-term funding in the capital markets. The game ended when the credit window jammed shut.
“Short-term funding has become extremely expensive and now they can’t roll over their loans,” he said.
Denmark has enjoyed a blistering credit boom over recent years, fuelled by membership of Europe’s Exchange Rate Mechanism which fixed the Dranish krona to the euro.
The policy caused the country to import the monetary policy of the ECB at a time when it was far too loose for Danish needs. Intrest rates were just 2pc until the end of 2005. The result was to push household debt to 260pc of GDP, the highest level in the world. This compares to 135pc in America.
Denmark’s housing bubble is now popping with the same destructive effect as bubbles in the US, Britain, Ireland, Spain, and indeed China. Danish prices have dropped 4pc so far nationwide on official data, but estate agents say properties are now off at least 20pc in parts of Copenhagen.
Across the Oresund in Sweden, the economy has ground to a halt and Volvo sales in Russia, Europe, and the US have plummeted. The flagship car company laying off 8pc of its 25,000-strong work force and cancelling a production shift.
Adding to the gloom, the pan-Nordic airline SAS is now battling for its life, the latest casualty of the global aviation crunch. The carrier has denied persistent reports that it will soon be taken over Lufthansa.
Stefan Ingves, governor of Sweden’s Riksbank, said on Wednesday his country had been battered by the “renewed wave of international financial unrest” but insisted that the banking system remained fully solvent. He described the swap agreement with the Fed as a precautionary measure.
The Swedish treasury suspended bond sales last week because the market had ceased to function properly.
There have been concerns that Swedish banks could face a squeeze over coming months as the property boom deflates and the losses mount on heavy investments in the Baltic region, where Estonia and Latvia are sliding into deep recession.
The International Monetary Fund has warned that the Baltic slump could “cause a credit crunch in Sweden itself” if the Swedish banks prove unable to roll over their loans in the wholesale capital markets.
It said that Swedbank and SEB are highly exposed to the region. Svedbank is the dominant lender in Estonia and Latvia, earning 30pc of its porfits in the region. The share prices of the two banks have fallen by two thirds since mid-2007 and are understood to have been the target of aggressive “shorting” by hedge funds.
