European and American Governments BandTogether to Fight the Financial Crisis

In a decisive week, the American and European governments struggle to contain the crisis.

The financial crisis has continually knocked the wind out of officials for the past month. The markets reopened each successive Monday with credit mechanisms frozen, thanks to the suspicion that bankruptcies will continue to rise and stock prices will continue to fall.

This time, American and European authorities have laid down their biggest assaults. In Washington, Treasury Secretary Henry Paulson’s plan has been approved by the Congress to allow banks to get rid of their dubious debts. In Paris, the leading European countries have shown a united front, assuring their support for businesses facing the crisis.

The parameters being defined, it remains to be seen if markets and corporations are actually reassured. On Sunday, October 5th, a Parisian agent confirmed that he, “fears the consequences of indebted corporations that have been unable to secure short-term financing.” He cites the example of the multi-national American corporation General Electric that asked for three billion dollars from billionaire Warren Buffett. On Sunday the two sides of the Atlantic on Sunday do not know what they fear more: the systemic risk of a domino-like financial bankruptcy or a brutal economic recession.

The Bailout Plan Must Show It Can Work In the United States

Wall Street ended down on Friday, despite approval of the new version of Henry Paulson’s “Emergency Economic Stabilization Act of 2008” by the House of Representatives, which had initially been rejected four days earlier. With this version, the State can spend up to $700 billion (500 billion euros) of public funds to allow banks to get rid of junk assets that were accumulated during the recent housing bubble.

The bailout plan was immediately signed by George W. Bush for a speedy enactment. The president assured taxpayers that the final cost would be “well below,” $700 billion. The amended version of the bill adds an additional 107 billion euros for tax cuts, while an amendment increases the equivalent of 70,000 to 180,000 euros guaranteed by the states on savings accounts. The two presidential candidates, John McCain and Barack Obama, praised the vote. But Fitch, a grading agency, predicted that with this plan, “the American government’s debt would exceed the 70% mark of the GDP for the first time since the 1950s.

Henry Paulson promised to respond “fast,” but “methodically”, withholding further details on the purchase of securities until Sunday afternoon.

At this time, the markets remained very fragile, meaning that the plan’s effectiveness can’t be measured for several weeks. “Ideally, this plan restores confidence. But that will only happen when the first transactions dealing with the foreclosures have been handled satisfactorily,” a Parisian banker asserted on Sunday. Meanwhile, the markets hold their breath.

Recession could still cloud the picture. After posting unemployment figures at 6.1% on Friday, its highest level in five years, newer figures in mid-October will be more up-to-date on American’s economic activity. If it’s not responsive, the Federal Reserve could lower its rates by .75 points in the coming quarter. Knowing that the risk of rising inflation may arise again, a slowdown in the demand for raw goods is expected.

At the Élysée , Europe Shows a United Front

On Saturday, Europe did its part by, “promising to support businesses affected by the crisis and doing it in a co-ordinated and appropriate fashion,” assured Nicolas Sarkozy at a press conference before a gathering of the four heads of state and European members of the G8 (Silvio Berlusconi, Gordon Brown, Angela Merkel and the French president), as well as the presidents of Eurogroup, Jean-Claude Juncker, of the Central European Bank, Jean-Claude Trichet, and from the European Commission, José Manuel Barroso.

The idea of a European-version of the Paulson plan has been mentioned but was scuttled as soon as Friday due to pressure from Germany. But Europeans promised to punish the leaders of bankrupt corporations and reinforce Europe’s regulation system. From now until the European Union summit in ten days time, they are awaiting solutions concerning methods to measure weighty assets that risk the banks’ balancing sheets.

They ask the purpose of the summit be to reform the structure of global finance. “Given that the American elections are in the beginning of November, we foresee a summit between mid-November and mid-December, bringing together the industrialized countries of the G8 as well as the leading developing countries,” asserts a spokesperson for the French president.

At the Élysée, Europe maintained that it will not fight the crisis in a frenzied matter, after a ill-advised sign sent by the Irish government when it had brought guarantee of deposits from some of the country’s biggest banks last Thursday. Will this display of cohesion be enough to reassure the markets? A source at the Élysée responded Saturday that “the credit freeze shows that markets are no longer moving for the moment. We are trying to get the depositors’ trust. The goal of this European meeting was to keep people from removing their deposits.

In France, The State Calls Up Its Reserves

Special situations demand special measures. While Nicolas Sarkozy believes to have obtained from his guests on Saturday night a provisional set of rules regarding a stability agreement through letting the debt and deficits work its course, several measures are going to be put in place to keep credit from drying up, something that Nicolas Sarkozy considers to be the biggest threat. “The priority of priorities is to save the banking system,” explains the head of state’s entourage. In order to infuse money in the market, the government appealed again to its treasury (it has already agreed Wednesday to buy back 10,000 of the 30,000 houses taken by the state to support the private sector) to infuse money from its reserves as soon as possible. Twenty-two billion euros are thus going to be made available to PME*.

On the other hand, Booklet A will not be called upon to contribute. Its symbolic value is very strong for investors, and the discontent of social housing representatives, worried if they will be able to draw from their capital, have compelled to government to review their sheet once more. The money is going to be taken from the Booklets of Popular Savings (BPS) and under the ex-Codevi, now called the Booklet of Lasting Development. In theory, the banks’ collected savings under the BLD will no longer be bought back by the treasury (9% of it as of today) and those collecting under the BPS will only be more protected up to 75% (against 85% today). In return, the banks will promise, in an agreement signed with the state, to better direct this money toward the credit for PME.

Officially, the government refuses to talk about its stimulus plan, at the time when unemployment is at the forefront of the French’s concerns, as the TNS-Sofres/La Croix tracker reveals (see page 10). The polls certainly show it. And at the l’Élysée, other positions are announced quickly if the banks find themselves having a problem with liquidities. For example, the surplus of Booklet A’s collection. Claude Guéant, Secretary-General of the Presidency of the Republic affirmed on Sunday, October 5th, “If there was the smallest problem, there would be intervention.”

*PME is the Development Bank for Small and Medium-sized Enterprises