The detailed plan to be agreed on by European officials next weekend “will be decisive,” French Finance Minister Francois Baroin said Saturday as he concluded a two-day session with finance ministers from the Group of 20 major economic powers.
But the plan excludes the open-ended use of the European Central Bank as a guarantor of government debt and the swift infusion of public capital into banks that U.S. and IMF officials say could be critical to restoring confidence in the euro region. Both were central elements of the effort to shore up the U.S. financial system three years ago.
“They clearly have more work to do,” U.S. Treasury Secretary Timothy F. Geithner said after the meetings adjourned, withholding judgment on whether the European plan will prove convincing.
“It’s all in the details,” he said. “In financial crises, it is more risky to act gradually and incrementally than to act with bold force.”
At the peak of the U.S. crisis, then-Treasury Secretary Henry M. Paulson Jr. summoned major bank executives to an October 2008 meeting in Washington and ordered them to immediately accept billions of dollars in government money. Paulson argued that the infusion of funds was vital for saving the financial system and that all the banks had to take the money, regardless of whether they needed it, so none would be singled out for accepting a bailout.
European leaders have rejected a similarly swift and dramatic response.
Their planned effort to prepare banks for a possible default by Greece or another heavily indebted European nation could take until June to complete. Banks first will be asked to raise extra capital from private sources — such as their own profits or a new sale of stock — and then, if necessary, to appeal to their governments for public help. If a government cannot afford it, officials could ask to borrow the money from the new bailout program, the European Financial Stability Facility.
Funding: Public vs. private
The step-by-step process is a concession to European politics. Officials in Germany, the most influential voice in the euro zone, are insisting that new bank capital should come from private investors before public sources. Taxpayers in many nations are weary of footing the bill for bailouts already underway in Greece, Portugal and Ireland.
But some analysts say the plan means months more uncertainty while potentially weakening banks that have to turn to public sources for help and admit they cannot raise money on their own.
It “is going to be very tricky and very long,” said Anne-Charlotte Com, a bank analyst with the Aurel BGC investment firm.