EU rescue fund rejected as US bailout advances

The European Central Bank’s chief and the chairperson of euro zone finance ministers sided with Germany on Thursday in rejecting any need for a European rescue fund for banks suffering from the global financial crisis.

France confirmed that President Nicolas Sarkozy would host a summit on the global financial crisis with leaders of Germany, Britain and Italy, European Commission president José Manuel Barroso, European Central Bank president Jean-Claude Trichet and Eurogroup chairperson Jean-Claude Juncker in Paris on Saturday.

The announcement put an end to uncertainty about a meeting Paris has pushed for, due to disagreements among the main European Union governments on the right response to the deepening credit crunch.

An unnamed senior Greek finance ministry official said the country would guarantee all deposits at its banks. Such a move would ignore criticism of a similar move by fellow euro zone member Ireland, which has attracted criticism from Britain and Spain as well as misgivings among Brussels’ competition authorities.

Governments in Germany, Britain, Belgium, The Netherlands and Luxembourg have ridden to the rescue of banks in the past week, using state funds to take full or partial control to restore confidence in ailing lenders such as Fortis and Bradford & Bingley.

European officials welcomed the US Senate’s approval of a $700-billion plan to take so-called toxic assets off banks’ balance sheets, but they insisted Europe did not need a similar programme or was not ready for it institutionally.

”We do not have a federal budget, so the idea that we could do the same as what is done on the other side of the Atlantic doesn’t fit with the political structure of Europe,” the Trichet told a news conference.

The bank left its interest rates unchanged on Thursday although it discussed a cut amid slowing growth and easing inflation risks.

Eurogroup chairperson Juncker said: ”I don’t see the need for us to set up a similar programme in Europe.” Euro zone and European Union finance ministers meet on Monday and Tuesday respectively in Luxembourg.

Several European government sources said France had floated the idea of a €300-billion ($418,4-billion) EU bank rescue fund ahead of Saturday’s meeting, although Paris denied the existence of such a proposal.

Sarkozy publicly said no EU-wide bailout was in the works and denied a €300-billion fund was under consideration.

British Prime Minister Gordon Brown’s spokesperson said he did not expect discussion of an EU-wide bank fund at the meeting.

”The purpose of the meeting will be to discuss how each of the four major economies in Europe are responding to the global financial crisis,” he said.

Safety net?
French Economy Minister Christine Lagarde has said a ”European safety net” could be needed to prevent a bank in a smaller EU country from going bankrupt.

But German Chancellor Angela Merkel said Germany ”cannot and will not issue a blank cheque for all banks”.

Germany’s Finance Ministry said the German government ”completely disagreed” with the idea.

Dutch Prime Minister Jan Peter Balkenende voiced his opposition to an EU-wide rescue fund, but said national governments could set aside money to help any troubled banks in their own countries.

”The [Dutch] plan is for every member state to put aside money to make a capital injection for their own banks if necessary. The idea is that it will be some 3% of gross domestic product,” he said after talks with Sarkozy in Paris.

Separately, Spain’s Economy Ministry said it would support a coordinated EU effort to raise bank deposit guarantees from the current Europe-wide minimum of €20 000.

The Irish decision on deposit guarantees posed a challenge for the rest of Europe in an era where banks are increasingly cross-border, risking a distortion of competition which EU rules are meant to prevent.

”Speaking as a Spanish citizen, I think it’s a measure that creates quite a deal of irritation,” said Spanish Economy Minister Pedro Solbes, echoing criticism from Britain, which has already seen an outflow of cash from its banks to Ireland.

”It appears to be an issue that deserves the full attention of the European Commission to see whether these rules are compatible with community legislation.”

Greece decided to follow Ireland’s example, a senior finance ministry official said, although Finance Minister George Alogoskoufis publicly reiterated his faith in the solidity of Greek banks.

The European Commission said it had not received details from the Irish authorities of the law passed early on Thursday, so it could not assess if the measure was in line with the bloc’s state aid rules.

A Commission source said any legal action would be politically risky at a time when Brussels is trying to persuade the Irish to reverse their vote against the EU reform treaty, and would anyway take at least two years to come to court.

Belgian Prime Minister Yves Leterme, meanwhile, said risks remained for the banking system even after the government’s bailouts of two Belgian-based financial groups — Fortis and Dexia.

Italian Economy Minister Giulio Tremonti said global accounting rules should be discussed at the Paris meeting. A requirement that companies regularly restate the value of assets on their balance sheet to reflect changed market prices has been widely blamed for exacerbating the crisis.

Other possible European responses in the pipeline or on the table include mandatory regulation of credit ratings agencies after they were accused of having conflicts of interest and failing to spot risks in subprime mortgage-based securities. – Reuters

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