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Saturday, December 2, 2023

This Wasn’t The First European Bank Bailout

This Wasn’t The First European Bank Bailout

Courtesy of Tom Lindmark at But Then What


If you’re like me, you probably bought into the meme that the $1 trillion that was more or less committed yesterday by European nations to forestall inevitable debt restructurings amounts to their version of TARP. While TARP was originally a program to rescue the US financial system (we’ll ignore the slush fund that it degenerated into at this time), the European plan is being advertised as a solution to sovereign debt issues, a defense of the Euro and a bit of help for the financial system.

In fact, it’s probably mostly about rescuing Europe’s banks which were on the verge of another liquidity crisis. I suspect that the specter that prompted the radical decisions reached over the weekend was not a Greek default or the knock-on effects it might have, rather it was the very real possibility that if they didn’t do something their banks might not have survived today.

But, the point that seems to have been missed is that this isn’t TARP l for Europe. The WSJ Deal Journal points out that they’ve already doled out a boat load of money to their banks.

Remember it was only two years ago that many of these very same European banks that are rallying today were the recipients of an earlier round of government largesse.

Today’s trillion dollar rescue comes on top of the $64 billion that the UK injected into its banks in October 2008, the $94 billion that German injected in its own troubled banks that Fall, the $54 billion that France spent and the $9 billion that Spain spent. The Netherland spent $14 billion propping up and Switzerland spent $5.3 billion bailing out UBS.

And those are just direct capital injections. Germany also spent $513 million in government guarantees to support bank lending in 2008.

We can’t forget the controversial bail out of AIG, either. Sure, it was a U.S. company, but there were nearly two dozen European banks, including Deutsche Bank, Banco Santander, RBS and Lloyds that received $50 billion of U.S rescue funds to cover their trades with AIG.

Add those bailout measures together and it comes out to roughly to $900 billion.

We know we are probably leaving out few billion here or there. But like we said, it is hard to keep track.

The question that occurs to me is how the European banks could have been so monumentally dumb as to amass the amounts of sovereign debt which they purportedly carry. It’s not like Greece or the other PIGGS are half way around the globe. They’re next door neighbors and many of the biggest banks maintain extensive operations in the countries. You would guess that somewhere along the line any competent country manager would have had someone whisper in his ear that things weren’t all they seemed to be.

This is pretty much fundamental banking. No exotic financial products were really involved. So how did the banks get themselves so buried in bad country risk? Was it incompetence or were they doing the EU’s bidding? Perhaps more to the point, where do they go from here?

Eventually there will be a price to be paid for their serial bailouts. Never that far from being agents of the state, European banks might well emerge from all of this as private financial enterprises in name only and that would be one more sea anchor that the EU doesn’t need to drag around. 

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