Accessibility links

Breaking News

On Both Sides Of Atlantic, Economic Crisis Deepens

The financial crisis is deepening on both sides of the Atlantic, sending governments scrambling to find new ways to reassure the stock market, the banks, and the public that solutions are within reach.

Finance ministers from the 15 eurozone countries are meeting amid fears that the EU needs -- but does not have -- a coordinated strategy.

Washington, meanwhile, is looking for new measures after passage of a $700 billion bailout plan has so far done little to stem the crisis.

Global stockmarkets had one of their worst days ever on October 6. In just two measures of the universal drop, the Dow Jones fell 800 points, a one-day record, before partially recovering to a loss of over 300 points, while the Moscow and Paris indexes each recorded their worst single-day losses ever.

Most markets continued to plummet in early trading on October 7.

The stockmarket plunges appears to be a vote by investors that the measures taken by governments on both sides of the Atlantic so far are not enough to restore confidence in the economy.

In Europe, that reflects fears that the EU lacks the mechanisms for a coordinated response to the crisis. So far, member states have reacted to the prospect of failing banks on a state-by-state basis, even as many economists warn this could exacerbate problems.

European Commission for Monetary Affairs Joaquim Almunia sounded that warning again on October 6, saying that "we must absolutely avoid the negative consequences of unilateral moves." Almunia said such moves had "already created a number of problems for some member states and we must absolutely [counter] this risk."

He was speaking at a meeting of eurozone finance ministers in Luxembourg.

The finance ministers of the 15 eurozone states are currently holding a second day of meetings in Luxembourg in hopes of containing the crisis.

The question of EU unity has been highlighted by Germany -- the EU's biggest economy -- saying on October 5 that it would unilaterally guarantee all individual savings in German banks. That reassured worried German bank account holders after the government had to rescue one of the country's biggest banks -- Hypo Real Estate -- from imminent collapse.

But the German move, which follows similar unilateral guarantees to bank account holders in some smaller EU countries, has terrified other member states that are not yet ready to offer such blanket safeguards. They worry that account holders in one EU country could now switch their savings to another in search of greater safety, weakening those banks they leave behind.

EU meetings so far have only served to underline the fact that the union may now be facing a historical test of its capabilities as an economic unit. Although the bloc has been hugely successful in benefitting from its shared economy, it does not have a supra-national political and regulatory structure, or even a federal budget, to manage it.

This is despite the fact that many banks with activities in multiple EU states have liabilities that are far too large for any single government to cover should the banks fail.

Still, proposals by France and the Netherlands for a European bank rescue package worth some 300 billion euro have been dismissed as undesirable by Germany and Britain.

That leaves the EU states acting independently or regionally while universally calling for calm amid the storm.

European Central Bank President Jean Claude Trichet did just that on October 6 in Luxembourg.

"We are now at a moment during this evolution in which the pendulum has gone probably too far the other way and therefore, after having underestimated the risks, a great number of private actors are overestimating them now, which, of course, is an extreme handicap for the financial and monetary markets," Trichet said. "And therefore, on my part, I am calling on all the actors to show responsibility, courage, and confidence."

Iceland Looks To Prop Up Currency

Meanwhile, Iceland's prime minister, Geir Haarde, announced the takeover of that country's second largest bank to prop up a battered currency. The country also said it hopes Russia will lend it 4 billion euros ($5.44 billion) to help tackle the financial crisis threatening to overwhelm it.

Clouding a rapidly-escalating emergency, Russian Deputy Finance Minister Dmitry Pankin told Reuters no decision had been taken to lend money.

Haarde said government officials would go to Moscow to discuss the terms of the loan, which would bolster the country's foreign reserves. He said Iceland would not default on its sovereign debt.

The tiny state of 300,000 has in recent years grown from a fishing economy into a major offshore financial center, with its leading banks handling amounts of money far in excess of Iceland's annual GDP.

Iceland quickly became one of the world's richest countries, but the sudden exit of foreign capital has left it in dire straits.

On the other side of the Atlantic, U.S. officials are also looking for more ways to restore confidence. Washington has the mechanisms for a coordinated response to the crisis but so far has yet to see much impact from the $700 billion rescue package approved last week.

The U.S. Federal Reserve announced on October 6 that it would double the amount of cash it lends to banks, to as much as $900 billion, to help unfreeze lending markets.

In the simplest terms, that problem is the banks' fears that they no longer have enough money in their coffers to continue lending normally to other banks and businesses. The banks have seen much of their capital devalued by bad loans which they made at the height of the booming housing market in America -- a market that has since collapsed and made repayment of those loans impossible.

The U.S. government has earmarked up to $700 billion to effectively reimburse the banks for their losses and get the economy going again. But whether that is enough, and how long the medicine takes to work, remains an unanswered question.

compiled from wire reports