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money markets have frozen and these institutions are too large for taxpayers in
their home country to rescue.
Europe’s national leaders don’t have the tax base for a US-style
Individual European states could not agree to a US-style bail out over the weekend
because they do not have the tax bases to do so. The liabilities of Bank of America,
the largest US bank by balance sheet, are approximately half of the annual tax revenues
of the United States. That is a big ratio, but it is dwarfed by the ratio of liabilities
to home tax revenues of Deutsche Bank at one-and-a-half times, and of
Barclays at two times.
The financial crisis may hasten
European integration but slow
global banking
Avinash Persaud
Intelligence Capital
The currency markets have followed the scent of this fiscal issue ever since the
US began considering Treasury Secretary Paulson’s Plan. The Euro lost 5% in a little
over a week against the US dollar. But the problem may not be as bad as the
currency markets think. Big government can make big mistakes. Far from enviable,
the US approach may prove to be expensive folly. It is far from clear that
Paulson’s Plan will trigger private investment into banks, and if there is none, US
Treasury purchases of troubled assets above market prices is an expensive way to
inject new capital into the banks. I suspect Europe will eventually stumble towards
solutions to the credit crunch that are better for being constrained by Europe’s
national budgets, but can nevertheless operate effectively at the European level.
Better than Paulson’s Plan: Capital injections and debt-equity swaps
One idea that is emerging from the weekend discussions is for European governments
to offer an injection of equity capital into institutions that seek assistance.
I would add that as a condition of doing so, they should negotiate a partial debtfor-
equity swap of the bank’s creditors.
Getting sufficient capital is the problem that banks have today – we have
moved on from the liquidity problem of the last eighteen months – and injecting
capital is far less expensive than buying assets. The US is taking advantage of its
tax base more than it should. Using the promise of an equity injection as a lever
to negotiate a restructuring of bank debt will also help European taxpayers share
this lower burden of bank rescues with bondholders. Recall that bondholders were
paid to take the risk of bank failures.
Addressing government control issues with European-level
Many thorny issues arise when governments start taking equity stakes in local banks.
This is one of the reasons why the US authorities decided to be indirect and buy bank
assets instead. But Europe has the potential to do this one step removed from national

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