BUSINESS
12/08/2011 05:40 pm ET | Updated Dec 09, 2011

Euro Crisis May Force Europeans To Bail Out Their Banks, Too

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."

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12/09/2011 5:02 PM EST

Wall Street Finishes Week Higher After EU Deal

Wall Street closed higher this week, after European Union leaders announced that they'd reached a deal aimed at solving the Eurozone's debt crisis, according to Reuters:

The Dow Jones industrial average <.DJI> ended up 186.56 points, or 1.55 percent, at 12,184.26. The Standard & Poor's 500 Index <.SPX> was up 20.84 points, or 1.69 percent, at 1,255.19. The Nasdaq Composite Index <.IXIC> rose 50.47 points, or 1.94 percent, at 2,646.85.

For the week, the Dow rose 1.4 percent, the S&P gained 0.9 percent and the Nasdaq was up 0.8 percent.

Banks, which have been pressured by the uncertainty over Europe, rallied after the EU summit. Bank of America Corp rose 2.3 percent to $5.72, while JPMorgan Chase & Co added 3 percent to $33.18. The Financial Select Sector SPDR rose 2 percent.

Read the full story here:

12/09/2011 3:08 PM EST

Moody's Downgrades Three Major French Banks

The ratings agency Moody's has downgraded three major French banks because they have had difficulty raising capital.

Moody's slashed its rating of the long-term debt of BNP Paribas and Credit Agricole by one level to Aa3 and cut its rating of Societe Generale's long-term debt by one notch to A1.

"The probability that the banks will face further funding pressures has risen in line with the worsening European debt crisis," Moody's said.

--Bonnie Kavoussi

12/09/2011 2:26 PM EST

Britain's Balk From EU Treaty Raises Worry That It May Split From EU

British Prime Minister David Cameron's decision not to sign on to the deal reached by other European leaders raises worries that England may split from the EU, Bloomberg reports:

Dec. 9 (Bloomberg) -- David Cameron found himself left behind as the 26 other European Union leaders began negotiating the future of the region’s economy. Delivering on a veto threat his predecessors carried with them to Brussels for the past 30 years, Cameron strengthened the hand of members of his Conservative Party calling for Britain to pull out of the EU.

It was Conservative Prime Minister Edward Heath who took Britain into an embryonic EU, the European Economic Community, in 1973. His three Tory successors have each battled to maintain influence in Europe while refusing to sign up to the federal dreams of their neighbors.

Read the full story here:

12/09/2011 2:14 PM EST

In EU Rift, Cameron Loser, Sarkozy, Draghi Winners: Analysis

The deal European leaders reached Thursday indicates that in the EU rift, French President Nicolas Sarkozy and European Central Bank President Mario Draghi came out winners, while British Prime Minister David Cameron came out losers, Reuters writes:

BRUSSELS (Reuters) - Napoleon dreamed of it, De Gaulle fought for it, but Nicolas Sarkozy may have achieved it -- a Europe of Nations with France in the cockpit and Britain on the sidelines.

The French president emerged as one of the big winners of a European Union summit on Friday which ended with up to 26 member states agreeing to move forward in economic integration around the euro zone, and Britain alone in staying out.

"Of course this is not just a long-standing desire, but a long-standing goal of French politics ... because in the French tradition Britain never really belonged to the European Union, dating back to De Gaulle," said a senior EU official who attended the summit, referring to the French president's veto of British entry in 1963 and again in 1967.

Read the full story here.

12/09/2011 2:05 PM EST

IHS Global Insight: European Agreement Will Help Solidify 'Two-Speed Europe'

James Goundry, country analyst at IHS Global Insight, wrote in a report on Friday that unlike European government leaders, the European Central Bank ultimately holds "the key" to mitigating Europe's current liquidity crisis.

But he wrote that the importance of the agreement yesterday should not be discounted, since it "could well mark a significant moment in the creation of a so-called 'two-speed' Europe, which began with the creation of the single currency." Goundry added:

"The European Council statement makes clear that a new 'fiscal stability union' would seek to deepen the internal market and enhance competitiveness and social cohesion, in addition to creating stronger fiscal and economic rules. Outside this union, the UK is likely to become increasingly irrelevant and marginalised."

12/09/2011 1:49 PM EST

NYT Graphic Tracking Crisis By Country

The New York Times is featuring a graphic that's tracking developments by country.

Check it out here:

12/09/2011 1:40 PM EST

European Economist: Europe Has Accomplished Only One Of Three Necessary Goals

Charles Wyplosz, an international economics professor at the Graduate Institute in Geneva, wrote in a blog post for VoxEU that European leaders still need to accomplish two more large goals in order to address the sovereign debt crisis.

Wyplosz wrote:

With regard to the crisis, the beginning of the end requires three steps:

A backstopping of sovereign debts by the ECB;

A credible commitment to fiscal discipline over the next 50 years or so in order to reduce existing debts to comfortable levels;

Debt restructuring.

The summit has moved seriously on the second step, which makes the first step more plausible but, unfortunately, appears to have backtracked on the third.

12/09/2011 1:35 PM EST

The New Republic's Matt O'Brien On Why The ECB Needs To Save Europe And Why It Won't

Add The New Republic's Matt O'Brien to the chorus of commentary criticizing the European Central Bank for not doing more to stop the Euro crisis. O'Brien argues that the ECB is the only institution that can truly save the day:

It’s not yet certain whether European leaders will arrive at an agreement at today’s summit in Brussels, but what’s already clear is that Europe is running out of time. After two years of kicking the can down the road, contagion from the continent’s debt crisis has begun to infect Europe’s core. Indeed, the credit rating agency S&P recently threatened to downgrade the credit ratings of the entire Eurozone due to the increased risk of financial cataclysm. Increasingly, commentators are suggesting that only one European institution can possibly save the day: the European Central Bank.

Read the full piece on TNR's website.

12/09/2011 1:29 PM EST

Key Players In Europe's Financial Crisis

The AP put together a list of the key players in the European financial crisis such as Angela Merkel, Nicolas Sarkozy, David Cameron and others.

Check out the cheat sheet here.

12/09/2011 1:23 PM EST

Germany Is Considering Bailing Out Nation's Second Largest Bank: Der Spiegel

Germany has laid out plans for rescuing its second largest bank from default if necessary, according to the German newspaper Der Spiegel.

German government sources told Der Spiegel that if Commerzbank does not raise enough capital by next summer, Germany will buy a majority stake in the bank. The European Union has mandated that European banks need to raise their capital ratio to nine percent, which Commerzbank may not be able to manage.

"Commerzbank is the clinical thermometer for the euro crisis," one source told Der Spiegel.

--Bonnie Kavoussi

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