It was another tough weekend for European politicians and bankers. They did what they were supposed to, but it looks like another tough week lies ahead.
The authorities are certainly trying. On Sunday morning, three European banks faced serious challenges. The rescues of Hypo Real Estate Holding AG in Germany and the Belgian part of Fortis NV had proven inadequate, while the Italian Unicredit Group looked short of capital.
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By 6 October, these problems had been resolved—by a bigger rescue, a takeover and a capital raising, respectively. Not bad for a region with a reputation for muddled indecision. There were also new deposit guarantees in Germany, Austria and Denmark, warm words from the leaders of the four largest economies and broad hints of a recapitalization of UK banks.
But investors weren’t comforted. The region’s stock markets dropped by 5-6% early on 6 October, the money markets remained virtually frozen and the euro fell by 1.5% against the dollar and 3.1% against the yen. There are specific worries about overleveraged Iceland and Russia, but the grim reading of the news is part of the mood—painful global deleveraging has bred fearful mistrust.
It shouldn’t have come to this. A year ago, Europe looked well placed to fend off financial ills. True, the UK had US-style problems with a housing bubble and a big trade deficit, but the euro zone had few bubbles, balanced trade, reasonably prudent governments, a firm central bank and a strong tradition of government guidance and support in banking.
It turned out, though, that some European banks had dabbled too much in overvalued and overly complex US assets. The authorities have also been slow. Governments’ solutions to institutional problems have been fragmentary and central bank liquidity provision reactive.
With Asia slowing and the US struggling, Europe cannot depend on the rest of the world to rebuild confidence. It needs to act boldly itself. Perhaps the UK, the most troubled of the big European economies, will take the lead. A comprehensive reorganization—with taxpayers getting preferred shares and banks being led to an orderly deleveraging—could be just what the markets need.