The bank bailouts of 2008 created a firestorm of public anger in the United States. Now European leaders are trying to avoid the same fate. It's not looking good.
European Central Bank President Mario Draghi on Thursday denied the possibility that the ECB would bail out European banks by buying large amounts of troubled government bonds. Yet many economists and observers believe the central bank ultimately will have to give in.
For a while it seemed like Europe was going to take a hard line against banks. In November 2010, at Germany's urging, European leaders agreed that they would pursue "haircuts" instead of bank bailouts, essentially forcing the banks holding troubled government debt to take a loss. This past October government leaders forced banks to swallow a 50 percent cut on the value of their Greek government bonds.
European leaders agreed to force a haircut on Greek government debt because it had become simply unsustainable, and some sort of partial default was necessary, said Michiel Bijlsma, program leader of financial markets at the CPB Netherlands Bureau for Economic Policy Analysis.
The move was a last-resort effort to rescue the Greek government from default, but it was also a victory for Germany. German Chancellor Angela Merkel had been insisting that banks take part of the loss. "Have politicians got the courage to make those who earn money share in the risk as well?" Merkel said in November 2010, according to Reuters.
Merkel's tough talk played well at home, particularly as the foil to the United States' bank bailouts. Many in the U.S. believe banks got off easy and blame the government for bailing them out.
"There's an electoral price to be paid for bailing out banks," said Bo Becker, assistant finance professor at Harvard Business School. "Merkel and her party have ridden somewhat high in the last few years on the claim that German responsibility and so on is better than the United States' easygoing financial system. So she especially has a lot to lose."
But recently Germany has been forced to change its stance. The country agreed earlier this week to eliminate the possibility of any more haircuts on government debt. European leaders are hesitant to force more haircuts since banks are now in a weak position, and more haircuts could trigger a collapse of the the European banking system, some economists say.
Back in 2008, when the United States banking system was similarly on the brink of collapse, the Treasury Department and Federal Reserve acted quickly and decisively. The federal government took ownership stakes in banks and the Fed loaned money to them. Meanwhile, the Fed also bought large amounts of mortgage-backed securities when no other investors would touch them.
"Americans are more pragmatic and less ideological when it comes to emergency action," said Harvard economist Richard Cooper. Though part of the eurozone's slow response to the crisis can be attributed to Europe's "exceptionally clumsy" decision-making apparatus, he said, the delay can be in part attributed to the German perception that they should cast blame for the crisis as it is being solved. In contrast, he said, "Americans say, 'Let's get the problem behind us, and we'll decide who goes to jail later.' "
A full U.S.-style bailout isn't necessarily an option for Europe, however. The European Central Bank can't buy government bonds directly, as the Fed does routinely. Since the European Central Bank legally cannot bail out governments, bailing out private banks seems less justifiable, Paris-based economist Gael Giraud said. "That's why the banks were partially convinced to accept to pay something," he said of the Greek haircut.
But more haircuts would not by themselves dig Europe out of this hole. Because if over-leveraged banks are forced to reduce the value of their assets, en masse, they could fail. That could either blow up the economy or force European countries to do what the United States did three years ago: Bail out their banks. It's just taking longer.
"Unless the Europeans can solve the sovereign debt crisis," Cooper said, "there will certainly have to be some form of support for the European banks."