In Europe, the situation unfolded slowly, as bankers and leaders first said the continent was immune to Anglo-American excess.
London swaps dealers were called into the office on the weekend of the Lehman implosion to make sure all of their obligations were met and went home two hours later. Officially, they said everything was fine, but observers told a different story.
“It’s impossible to match up all the counterparties in a weekend, or even a week or a month,” said one veteran swaps dealer. “I’ve worked on cases where you have to figure out who owes what to whom after a small bank goes under, that takes weeks. Something like Lehman, forget it.”
Unlike the coordinated effort executed in the United States, European leaders each pursued their own agendas, with Ireland immediately guaranteeing all bank deposits, France advocating a pan-European solution similar to the one undertaken in the United States and Germany advocating “institute-specific” solutions rather than systemic ones, at least in its own banking turf, which Finance Minister Peer Steinbrück insisted was the safest and most sound in Europe.
Fortis Bank, a continental powerhouse in the retail and institutional futures segment, was partially privatized by the governments of Belgium, the Netherlands and Luxembourg, which together put up €11.2 billion for 49% of the company.
Then it was Germany’s turn, when Hypo Real Estate, the country’s second-largest commercial property lender, found itself in need of €35 billion in support after its Dublin-based unit Depfa Bank PLC failed to attract short-term funding. A consortium of unnamed banks balked at putting up €10 billion once they had a peek at the books.
Then tiny little Iceland nationalized three banks with liabilities at least three times as large as the country’s GDP, marking it as the first country to be in danger of going bust in the mess.
OMX Nasdaq halted trading on its Icelandic platform, as regulators in other European countries rushed to guarantee deposits, while also threatening to sue Iceland (not an EU member but abides by UN banking laws) if the action results in losses. Iceland’s interest rates immediately soared, and its currency plunged.
Two days later, just as U.S. Treasury Secretary Henry Paulson announced that the U.S. was taking a stake in domestic banks, German Chancellor Angela Merkel reversed herself by saying she was open to the idea of nationalizing German banks as well.
At press time, London Swaps dealers say that Germany’s Landesbanks (public-private entities closely tied to Germany’s state governments) had been among the most aggressive buyers of mortgage-backed bonds, not only from the United States, but also from Ireland and Spain.
The United Kingdom took the most draconian measures of all, buying banks and scooping up dodgy paper in a deal that will involve as much public sector funding as the U.S. action. If credit default swap prices are any indication, then the market likes the government right about now. Ten year credit default swaps in Europe dropped from nearly 20¢ for every dollar insured to roughly 10¢.