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European Countries Implement Separate Responses to Banking Crisis

The global financial crisis has hit Europe's banks especially hard. The ripples are being felt from Iceland to Greece, and governments have been responding individually, rather than waiting for help from the European Union. From Washington, VOA's Kent Klein looks at the problem and how it's being addressed.

This has been a disastrous week for banks across Europe. Iceland's banking system has collapsed, leading to what Prime Minister Geir Haarde calls a risk of "national bankruptcy." Britain's government announced an $88 billion plan to partly nationalize major banks, and promised to guarantee $438 billion in bank loans. Ireland guaranteed 100 percent of bank deposits, as well as loans to its banks from other banks. Germany proposed a $69 billion rescue package for a troubled commercial property lender. Two of France's top banks announced plans to merge. Switzerland's government is stepping in to prevent the collapse of either of its two major banks. And the Benelux-based Fortis bank is in trouble as well.

There are many explanations for how Europe's banks arrived in their current predicaments. Richard Marston, professor of economics at the University of Pennsylvania's Wharton School, says one cause of the problems started in Europe, and the other spread from the United States.

"There are countries in Europe, such as Britain and Ireland and Spain, that have had more of a run-up of real estate prices than the U.S.," he said. "And so inevitably, there has been a big impact on the banks. And then you have the banks, such as those in Belgium and Holland and Germany, that have bought mortgage-backed securities in the U.S."

The result of these and other problems is a loss of confidence among bankers, who are now afraid to lend money to each other, freezing up the credit markets in Europe and elsewhere.

One approach to the problem was the British government's initiative to partly nationalize its big banks. It did not stabilize the stock markets, but Paul Kedrosky, a senior fellow at the U.S.-based Kauffman Foundation, is among the economists who say it was a good move.

"By nationalizing or partially nationalizing the banks, you say, 'You know what, these banks are safe, insofar as we as a country are safe.' So you are doing what you can to convince people in the credit markets that the banks are safe. It is about the most heroic thing you can do," he said. "You cannot throw a pass further downfield than doing that."

Europe's central banks have steadily offered money to the financial industry in the past few weeks, trying to encourage banks to lend to one another. On Thursday, the European Central Bank, the Bank of England and the Swiss National Bank offered a combined $120 billion. Marston says the ECB, the Bank of England and the U.S. Federal Reserve have been particularly proactive in lending money to banks.

"It is certainly the most serious crisis since the Second World War, and it has required that central banks be very, very imaginative, and I must say, to a great extent they have done a wonderful job," he said.

Also this week, central banks in England, China, Canada, Sweden and Switzerland and the European Central Bank worked together to cut interest rates.

But many of the European governments faced with a banking crisis acted on their own, rather than working through the European Union. Paul Kedrosky says that shows that the EU is not equipped to respond quickly enough to a problem of this kind.

"Those countries faced most directly by a failing banking system - Greece, Germany to some extent, and certainly Iceland and Ireland - began taking independent action because they did not feel they could wait for a unified answer," he said.

Amid the fear and worry on Europe's financial markets, there is some optimism. John Mathis, Director of the Thunderbird Global Financial Services Center in Glendale, Arizona, says European governments have acted quickly, and a return of confidence will follow eventually.

"Now we just need time," he said. "We need time for people to get through the process of loss of confidence and to rebuild confidence that, 'OK, the government is playing a key role, they are not going to let any more fail, I am fine, I am OK, I am willing to go ahead and accept the risk.'"

Bankers throughout Europe are hoping that their governments' bold moves will succeed.