[D66] Merkel, Sarkozy want to give the banks more capital

[Antid Oto]

Merkel, Sarkozy want to give the banks more capital
By Peter Schwarz
11 October 2011

French President Nicolas Sarkozy and German Chancellor Angela Merkel met in
Berlin on Sunday against a background of sombre warnings of new bank failures,
an impending bankruptcy of Greece and an imminent collapse of the euro.

After the meeting they both declared their willingness to aid banks in the euro
area with fresh infusions of public funds. They also promised to present a
convincing and comprehensive package to resolve the crisis by the end of the month.

Merkel declared that Germany and France were aware of their shared
responsibility for the euro zone, the European Union (EU) and the world economy.
They would work together and do whatever necessary to ensure a recapitalization
of the banks in Europe.

Sarkozy expressed his “complete agreement” with Merkel: “Sustainable, global and
fast solutions” for the euro crisis must be found for the G20 summit on November
3-4 in Cannes. Germany and France wanted to propose “significant changes” to EU
treaties, to allow for “binding co-operation on financial and economic policies
for the euro member states.”

Merkel and Sarkozy, however, refused to give any specific details. Their
ostentatious display of unity was principally directed at calming panicky stock
exchanges and financial markets.

On Monday, EU Council President Herman Van Rompuy announced that the EU summit
scheduled for October 17-18 would be postponed for one week. Suspicions emerged
that fundamental differences between Merkel and Sarkozy were behind the decision
to shift this complex event involving 27 heads of government. Merkel and Sarkozy
both denied this was the case.

The agreement between Merkel and Sarkozy to recapitalize European banks came
following massive international pressure.

In the columns of the Financial Times, the prime minister of Britain, which does
not belong to the euro zone, called on Germany and France to resolve their
differences and tackle the euro crisis with the use of a “bazooka.”

“Time is short, the situation is precarious,” David Cameron warned, writing that
the very existence of the monetary union was threatened.

Cameron demanded an action plan to recapitalize the banks, a massive expansion
of the Euro-bailout European Financial Stability Facility (EFSF), a clear future
strategy for highly indebted Greece and more involvement by the International
Monetary Fund.

Earlier, US President Barack Obama had urged the EU to take more far-reaching
measures to tackle the debt crisis. “They’ve got to act fast,” he told a press
conference, demanding a “very clear, concrete plan of action that is sufficient
to the task.”

Over the weekend, the Belgian-French bank Dexia collapsed—the latest victim of
the crisis. After a joint meeting on Monday night, the governments of Belgium,
France and Luxembourg announced the break-up of the ailing bank. The Belgian
government is to take over the Belgian part of the bank for €4 billion. Dexia’s
risky securities are to be swapped into a “bad bank,” with the three states
providing guarantees totalling €90 billion.

Dexia was rescued in 2008 with €150 billion in public funds. At that time, the
bank had invested heavily in US real estate. Now, the collapse of European
government bonds, in particular Italian and Greek bonds, under the impact of the
European sovereign debt crisis has once again created problems for the bank.

The increase in equity for European banks, agreed in principle by Merkel and
Sarkozy, sets the stage for the bankruptcy of Greece. European banks are to be
provided with sufficient capital to cope with large losses on the value of Greek
bonds.

There are, however, profound disagreements over how to finance the
recapitalization of the banks. French banks are especially heavily exposed in
Greece, and Sarkozy wants to use the EFSF to bail them out. The German
government, which contributes the largest share to the EFSF, rejects such a
course and wants to encourage banks to obtain the necessary capital before
national governments intervene—with the EFSF coming into play only in an extreme
emergency.

The German and French administrations also have conflicting views regarding
future dealings with Greece. According to media reports, the German Finance
Ministry is working on plans to provide for a debt haircut of up to 60 percent,
which would technically amount to a bankruptcy. The Greek government would be
insolvent and would have to dramatically slash its public expenditure. Creditors
would be required to write off a large portion of their bonds, an event that
would hit French banks particularly hard. Paris, therefore, wants to postpone a
bankruptcy as long as possible and gain time.

Both governments also know that a policy involving donating further billions of
public money to the banks is highly unpopular, at a time when public spending is
being massively cut and Greece will be driven into bankruptcy. Media and
politicians fear that hostility to the banks will continue to grow and develop
into a broad, uncontrollable social movement.

German Social Democratic Party (SPD) chairman Sigmar Gabriel warned the Merkel
government not to give the banks any more money without imposing stricter rules
or temporarily nationalizing them. “We cannot save the banks for the second time
without pruning them back,” he told the FAZ newspaper. “The motto must be: ‘not
a cent from the state to bail out the banks without fundamental changes’.”

Die Zeit said it was a mistake to focus on recapitalizing the banks in order to
rescue the euro: “The message this sends is that when we have secured the banks
we can let the states go.”

A commentary in the Sueddeutsche Zeitung even called for “civil protest in the
streets” against the power of the financial industry. “Whoever wants to protest
against this naked redistribution in favour of finance capital will find no
place inside the German parties, the paper wrote. “The major parties seem like
playthings of the markets.”

This newspaper, which is notoriously conservative in economic issues, is
obviously not about to launch a movement against capitalism. Rather, it is
seeking to establish a pressure valve before popular anger gets out of control
and really threatens capitalism. “It’s time for people to take to the streets in
Germany and force the parties to rethink,” the newspaper stated, declaring at
the end of its comment: “Not to abolish capitalism but to reform it.”

http://wsws.org/articles/2011/oct2011/merk-o11.shtml