France and Germany have pledged to present a bailout package by the end of October for European banks holding insolvent government bonds. While markets have jumped as a result, no details for the plan have been presented. German financial observers are less optimistic, noting that banks will reel in lending if they are forced to write off further bonds purchased from insolvent governments like Greece. “The problems are immense,” they say. Some banks are already rejecting the idea of higher capital requirements.
What’s the Big Idea?
Whereas Lehman Brothers collapsed as a result of empty mortgage collateral, European banks face an entirely distinct situation. Government bonds, long considered the safest investment for anybody, are losing their value as a result of economic crises in countries like Greece and perhaps Italy and Portugal. French banks seem particularly vulnerable as they have been some of Greece’s leading creditors as well as holders of other E.U. bonds that are now trading at much less than their rate of purchase.