Global Insight Perspective
Europe's largest economies, including France and Germany, have revealed the details of their national financial rescue packages.
The packages have already caused markets to rally, indicating that the multi-billion-euro U.K.-style rescue measures are having the desired effect.
The wider implications of the packages for national economies and market confidence will only become clear over time, but the early indications are that the worst of the crisis could be over.
The powerhouse economies of the Eurozone yesterday presented wide-ranging state bail-out measures designed to help combat the financial instability that has wracked their banking institutions in recent weeks. The measures, largely in line with the U.K.-style rescue plans agreed on Sunday (12 October) at a Eurozone emergency summit, include recapitalisation, state ownership, government debt guarantees, and improved regulations (see World - United Kingdom - Europe: 13 October 2008: Eurozone Follows U.K. Lead in Bid to Stem Financial Crisis). The amount of money distributed depends on the characteristics of the financial sector of each individual country, but the general consensus has been to pledge the majority of funds for bank debt guarantees. The total value of the various packages is yet to be accurately assessed, but at present it looks to have topped 2 trillion euro (US$2.73 trillion). Austria, France, Germany, the Netherlands, and Spain have all released details of their bail-out packages, which in some cases top annual public spending.
Germany, Europe's largest economy, was the first to reveal its comprehensive bail-out package, which will cost up to 500 billion euro—the largest after the U.K. government's 640-billion-euro rescue plan unveiled on 8 October. The German package allows for 400 billion euro in bank guarantees and as much as 100 billion euro in state funds. Of the 100 billion euro being offered in state funds, 80 billion euro will be available for recapitalisation, while 20 billion euro is a provision for the 400-billion-euro guarantee offer. One of the strings attached to the recapitalisation is that the government will have the right to influence banks' direction and strategy, such as the composition of its equity capital and its dividend policy, as well as capping remuneration packages for executives. The measures allow for the creation of a Financial Market Stabilisation Fund, which will work to strengthen the capital base of institutions by guaranteeing inter-bank lending issued before 31 December 2009; it is hoped that the state guarantee will be enough for the banks to be able to raise capital for refinancing independently on the market. If necessary, the fund will also take on risky assets acquired by banks before 13 October 2008. The high level of funds being pledged almost totals the annual tax receipts in the country. The package of measures is likely to come into effect on Friday (17 October) after being approved by parliament.
There has been some resistance from state (Länder) governments, which object to being incorporated into the plan, having to provide 25% of the total financial coverage, yet it seems that they will grudgingly accept the package as it is deemed unavoidable for the sake of the financial sector's stability. Meanwhile, Finance Minister Peer Steinbrück has stated that the goal of a balanced federal budget in 2011, which was among his most highlighted policy priorities, has been shelved since it has become fairly unrealistic in light of this financial rescue package and also the much weaker economic outlook.
France, which as the current holder of the European Union (EU) presidency has been leading efforts to develop a pan-European response to the crisis, also presented its rescue package yesterday, which is expected to cost 360 billion euro. President Nicolas Sarkozy reiterated his commitment to propping up the banking sector, stating, "The French state will not let any banking establishment go bankrupt." The French government has decided to create two state agencies that will funnel the funds to where they are needed. One of the entities will be dedicated to issuing up to 320 billion euro in guarantees on inter-bank lending issued before 31 December 2009 and valid for five years. The entity will raise money on capital markets with a state guarantee and provide funds to banks in exchange for debt papers. The fund will only be lending to companies with good-quality assets that are not accepted in the European Central Bank's (ECB) regular refinancing operations. The other, which was already established on 3 October in order to facilitate the state’s efforts to buy a stake in troubled Franco-Belgian bank Dexia, will utilise a 40-billion-euro fund to recapitalise struggling companies by allowing the government to buy stakes. The parliament is expected to approve the measures by the end of the week; however, no French financial institutions have as yet expressed an interest in approaching the government for access to the funds.
Although the plan, which aims to improve banks’ capital ratios and access to liquidity, is necessary, there are concerns about its impact on the country’s already badly damaged public accounts. Budget Minister Eric Woerth has, very optimistically, stated that it will not affect the government's target of a national budget deficit of 2.7% of GDP in 2009. Indeed, the 320 billion euro in guarantees should not have any impact on the public accounts, as long as no bank fails. However, the 40 billion euro set aside to recapitalise financial institutions will go onto the state's books as debt. Public debt is already projected to reach 65.3% of GDP by the end of 2008—well above the Maastricht Treaty limit of 60% of GDP—and, if fully utilised, the 40 billion euro will add approximately another 2 percentage points to this figure. Additionally, the cost of servicing this debt will surely have an impact on next year's budget. On the other hand, these costs may be counterbalanced by dividends and capital gains received from the government’s ownership of shares in the banks. Furthermore, if the measures are successful, they should help to stimulate economic activity, which may be reflected in higher tax receipts. As a result, it is impossible to determine with accuracy the final impact on the public accounts.
In a deviation from the measures seen in France and Germany, Italy has not created a fund for its rescue plan, with Finance Minister Giulio Tremonti stating that, "As of today, we estimate that it's not necessary to have a predetermined figure." The package of measures announced includes a Treasury guarantee for new bonds issued by banks until 31 December 2009 and valid for five years. The guarantee will be supplied at market prices and requires the approval of the Bank of Italy. Italy, Europe's third-largest economy, has also lowered the minimum collateral guarantee required of banks seeking a loan from the central bank to 500,000 euro, which should provide banks with capital until the bottlenecks in inter-bank lending are loosened. The Bank of Italy will also engage in a 40-billion-euro debt swap, taking on inferior bank debt for government bonds that can then be used to obtain financing from the ECB. The debt swap is due to begin on 16 October and to last for one month. Italy is in stark contrast to other European nations by providing no firm capital commitments; however, the government's reluctance to create a rescue fund could partly be a reflection of the restraints imposed by its substantial public debt, which stood at 104% of GDP in 2007.
Rest of Europe
- Austria's 100-billion-euro rescue fund will be divided, with 85 billion euro spent on debt guarantees and 15 billion euro on increasing equity held by banks.
- The Danish government yesterday also passed legislation to guarantee all bank deposits and liabilities in the case that a 4.7-billion-euro fund established by commercial lenders to insure account holders and corporations proves insufficient.
- The Dutch government has presented a 200-billion-euro package to prop up its financial sector, with the majority of the funds to be spent on facilitating inter-bank lending.
- Portugal has pledged to guarantee 20 billion euro (11.7% of annual GDP) in inter-bank lending through a credit line to banks.
- Spain yesterday passed a law guaranteeing bank debt (inter-bank loans) issued up to the end of the year, which will be valid for five years. The Spanish government also announced that it would not be creating a fund for recapitalising banks, since the country’s institutions are liquid, but it is authorised to do this if it becomes necessary. The government has made 100 billion euro in funding available for the measures.
- Norway (which is not part of the Eurozone) on Sunday introduced a 41-billion-euro package to increase banks’ liquidity based around the issuing of new government bonds.
- Scandinavian countries are also expected to present bail-out packages, but they are not thought to include recapitalisation measures since their banks appear to be on a firmer footing than their European counterparts.
- Furthermore, the remaining members of the Eurozone are also expected to reveal packages today, in time for the start of an EU summit tomorrow, at which the financial crisis is expected to be one of the key issues on the agenda.
Outlook and ImplicationsThe main aim of the pan-European strategy is to unfreeze inter-bank lending, the lack of which has been one of the principal drivers of the financial crisis. Depending on the levels of take-up of the packages and the still-real possibility of banks failing, European governments could be taking a large risk with taxpayers’ money. Nevertheless, Global Insight believes that the governments had no alternative but to implement these measures, which, as part of a global response to the crisis, represent a step in the right direction to ease the current turmoil in the financial markets. The packages appear to be having the desired effect, with stock markets making modest recoveries yesterday—the German DAX 30 closed 11.4% higher, the London FTSE 100 closed up 8%, and the French CAC 40 jumped 11%. The rebuilding of investor confidence is likely to be a long-term project; however, improved financial regulation currently being debated by the EU is likely to make this a much smoother process.