ECB's Bini Smaghi Says AIG Rescue `Essential' for Markets

By Andrew Davis

Sept. 17 (Bloomberg) -- The U.S. government bailout of American International Group Inc. to avert the worst financial collapse in history was ``essential'' to restore confidence in financial markets and protect millions of consumers, European Central Bank Executive Board member Lorenzo Bini Smaghi said.

``Avoiding the turbulence spreading to a big insurer was a critical element,'' Bini Smaghi said today in an interview with Italian television station Canale5. ``You couldn't let a big insurer go under because it would have impacted on millions of consumers. The intervention was essential to restore confidence.''

The U.S. reversed its opposition to a bailout of AIG, the nation's biggest insurer by assets, after private efforts failed and the Federal Reserve concluded that ``a disorderly failure of AIG could add to already significant levels of financial market fragility,'' according to a Fed statement late yesterday. AIG received an $85 billion loan to keep it afloat.

The unrest in financial markets will continue until the world's banks can restore confidence in markets by demonstrating that they have confidence in one another, Bini Smaghi said.

``The markets need confidence and to restore that confidence banks and financial institutions have to have confidence in each other,'' Bini Smaghi said. ``Now they don't even feel sure enough to lend each other money that is pushing interest rates up and making it harder to get credit.''

European banks are certainly exposed to Lehman Brothers Holdings Inc. and will be directly affected by the collapse of the U.S. investment bank this week. He said it would take time to know just what the potential losses are, but that they should be ``limited.''

To contact the reporter on this story: Andrew Davis in Rome at