Bloomberg News

Europe May Need to Bail Out, Nationalize Lenders, Westpac Says

September 11, 2011

Sept. 12 (Bloomberg) -- European officials may have to bail out and nationalize some private banks to avoid another global recession, said Russell Jones, global head of fixed-income strategy at Australia’s second-biggest lender.

“The last thing really the global economy needs now is a major banking crisis in the euro zone,” Jones, of Sydney-based Westpac Banking Corp., said in an interview yesterday on the Australian Broadcasting Corp.’s “Inside Business” program. “The governments are going to have to put their hands in their pockets.”

Group of Seven finance chiefs and central bankers vowed in recent days to support banks and buoy slowing economic growth. “We will take all necessary actions to ensure the resilience of banking systems and financial markets,” they said in a statement released during weekend talks in Marseille, France.

A European banking collapse is “the sort of shock to the system when things are very fragile, as they are at the moment, that could really push us back into the sort of downturn we experienced in 2008 and 2009,” Jones said, according to a transcript of the interview. Nationalization is possible, “at least temporarily so,” he said.

Emergency steps such as unlimited loans from the European Central Bank are keeping many banks in Greece, Portugal, Italy and Spain solvent and easing the lending of others, while low interest rates and debt buying are containing borrowing costs. Such aid is needed to counter concerns about slowing economic growth and sovereign debt that are prompting banks to curb lending, stockpile dollars and hoard cash.

Market Turmoil

Stocks sank and the euro slid to a six-month low against the dollar on Sept. 9 as three German officials said that Chancellor Angela Merkel’s government is preparing plans to shore up banks should Greece default.

European bank credit risk surged to an all-time high on Sept. 9 and stocks fell worldwide on concern that the debt crisis is escalating. German two-year yields declined to a record as investors sought a haven and Greek two-year note yields added as much as 86 basis points to 55.91 percent, a euro-era record.

There’s little sign of a rebound in Europe. France’s economy stalled in the second quarter, Germany’s expanded 0.1 percent and the U.K.’s gross domestic product grew 0.2 percent

“A lot of the European banks had a lot of the government bonds which have been issued by some of the more, shall we say, struggling economies around the periphery of the euro zone,” Jones said. “They are not going to get all of the money back” should those nations default on their debts, he said.

Australia’s Slowdown

Australian households are saving more as assets including stocks and houses decline in value as the Reserve Bank of Australia maintains the benchmark lending rate at a developed- world high of 4.75 percent.

A 13.5 percent increase in the Australia dollar in the past year, spurred by a boom in mining investment to meet demand from India and China, is hurting the nation’s manufacturing and tourism industries.

On top of the high currency, “the lingering effects of the global financial crisis and continuing international uncertainty have resulted in Australian consumers being a lot more cautious in their spending,” Australian Treasurer Wayne Swan said yesterday in a weekly economic note. “This is making life harder for sectors like manufacturing, tourism and retailing.”

Swan also said a tax forum he’s convening next month will focus on ways to keep Australia’s government debt under control.

“We’ve seen how important it is to maintain a strong budget position in recent months as the United States and Europe have struggled to get their public finances on a sustainable footing,” he said. “The government will not be in the cart for any measures that compromise our strict fiscal discipline.”

Watching Rates

RBA Governor Glenn Stevens has signaled a willingness to keep rates on hold while the nation’s consumers retrench and global financial markets create instability for the “foreseeable future.” Last week he held rates for a ninth straight meeting, citing “unsettled” international markets.

Westpac’s Jones said the RBA may need to cut rates as signs emerge the economy is slowing, such as the jobless rate in August climbing to 5.3 percent from 5.1 percent, the highest since October.

The Australian economy “is not performing quite the way that the authorities thought it would or would like it to,” Jones said. “Irrespective of what is going to go on in the global economy, there are growing reasons for the Reserve Bank to embrace a more accommodative approach to monetary policy.”

--Editor: Paul Tighe, Jim McDonald

To contact the reporter on this story: Jason Scott in Perth at jscott14@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net


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