European Leaders Meet on Crisis, Focus on Oversight, Accounting

By Sandrine Rastello

Oct. 4 (Bloomberg) -- European leaders, convening today on the global financial crisis, have so far agreed on only one thing: Europe likely won't emulate the response of the U.S., where Congress gave final approval to a $700 billion rescue yesterday.

At the summit called by French President Nicolas Sarkozy that started around 4:30 p.m. in Paris, they're seeking to bridge divisions in the 27-nation bloc that have undermined a coordinated response to the deepening credit crunch. Governments rescued five European banks this week as their economies sink toward recession.

``Collective action is even more necessary in Europe than in the U.S. because Europe is more complex than the U.S.,'' Dominique Strauss-Kahn, managing director of the International Monetary Fund, said today in Paris after meeting Sarkozy. ``Action must be taken quickly and in a concerted manner.''

After Sarkozy and others dismissed the notion of creating a fund to shore up ailing financial institutions, the leaders of Germany, Britain, Italy, Luxembourg, the European Central Bank and the European Commission arrived at the Elysee Palace to discuss tighter financial rules and oversight, looser accounting standards, steps to limit economic damage, and cooperation on bank-deposit guarantees.

The days leading up to the meeting were marked by discord, with Germany criticizing a plan floated by French Finance Minister Christine Lagarde to set up a rescue fund and a chorus of opposition to Ireland's decision to guarantee the deposits and debts of its banks.

`Common Sense'

The fissures appeared as leaders arrived for the meeting. Sarkozy told reporters ``we must have a global answer to a global problem.'' Merkel, standing beside him, appealed to each country's ``common sense'' to prevent crises in the future.

Sarkozy distanced himself from Lagarde's proposal, outlined in an Oct. 1 interview with Germany's Handelsblatt newspaper, after Germany torpedoed the idea. ECB President Jean-Claude Trichet said Europe shouldn't try to copy the U.S. bailout.

``We don't have a federal budget, and so the idea that we could do the same doesn't fit the political structure of Europe,'' Trichet said Oct. 2.

Germany, Europe's biggest economy, expressed skepticism this week of any joint action, even after guaranteeing a 35 billion-euro ($48 billion) credit line for Hypo Real Estate Holding AG to save it from collapse.

``The idea of applying one solution, one big bang'' to the crisis ``is not practicable and would create new, enormous problems,'' German Finance Ministry spokesman Torsten Albig said Oct. 1. ``The tailor-made solution is the right way.''

Sarkozy's Call

Sarkozy has called for better control of credit-rating firms, stricter bank regulation and executive-pay limits.

The French president questioned, in a Sept. 25 speech, accounting rules that require banks to review their holdings each quarter and report losses when the value declines, the so- called mark-to-market standard. Banks worldwide have written down $587.7 billion since last year, according to data compiled by Bloomberg.

Italian Finance Minister Giulio Tremonti yesterday said the accounting rules would be on today's agenda.

``A chunk of the discussion will also be dedicated to bookkeeping methods that are less suicidal than those applied today,'' Tremonti said at a conference in Capri, southern Italy. ``We have rules that we don't need, not those we do need.''

Bank Guarantees

Fallout from the crisis that drove Lehman Brothers Holdings Inc. into bankruptcy hit Europe this week, with Germany, France, Belgium, Luxembourg, the Netherlands, Iceland and the U.K. rescuing lenders and Italian Prime Minister Silvio Berlusconi pledging to prevent losses for depositors. Sarkozy made the same pledge last week.

U.K. Prime Minister Gordon Brown, whose government seized lender Bradford & Bingley Plc this week, said leaders would continue propping up banks.

``No sound, solvent banks should be allowed to fail due to lack of liquidity,'' he said in Paris. ``We'll do whatever is necessary to ensure the stability of the system.''

Leaders may seek to harmonize the guarantee of deposit levels in the wake of the Irish move, said Laurence Boone, an economist at Barclays Capital in Paris. The U.K. bank regulator yesterday increased its insurance ceiling to 50,000 pounds ($88,500) per account from 35,000 pounds to stem a flow of funds to Ireland.

Harmonization ``would avoid unfair competition,'' Boone said. That ``could be used to say they have a common position and correct the impression that every country is doing its own rescue thing in its corner.''

Rate Cut Considered

With the economic outlook darkening, Trichet said on Oct. 2 that ECB policy makers had debated an interest-rate cut for the first time since the credit squeeze began last year when they decided to leave their benchmark at 4.25 percent.

Money-market rates jumped to records yesterday and the Bank of England relaxed borrowing rules for financial institutions to counter what it called ``extraordinary'' strains.

Speaking to reporters in London today before leaving for Paris, Brown said he'll propose a 12-billion-pound ($21.3 billion) fund ``so that small businesses in our country and the rest of Europe can get money immediately so that they can continue to employ staff and continue to provide services.''

To contact the reporters on this story: Sandrine Rastello in Paris at srastello@bloomberg.net;