France, Germany Clash Over Proposal to Bail Out European Banks

By James Hertling

Oct. 2 (Bloomberg) -- France and Germany clashed over whether to create a fund to bail out banks pounded by the global credit crunch, kicking off a European version of the debate that has been raging in the U.S. for two weeks.

French Finance Minister Christine Lagarde told the German newspaper Handelsblatt in an interview to be published today that a ``rescue package'' was needed to help ``smaller'' European states ``threatened with a banking failure.'' Germany opposed the proposal, with finance ministry spokesman Torsten Albig saying his government ``doesn't support the plan.''

The conflict between the two biggest euro-region economies undermined efforts to build a consensus European response to the financial crisis as a recession looms. Other fissures emerged, as Ireland's decision to guarantee bank deposits and debts prompted criticism by British bankers yesterday that it ``distorted competition.''

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

In the U.S., Treasury Secretary Henry Paulson proposed a $700 billion bailout on Sept. 20 that lawmakers have been struggling to pass. The House of Representatives rejected a version of the plan two days ago. Senate leaders expected the package would win approval late yesterday in Washington and urged opponents in the House to drop their objections.

`Non-Starter'

A European version of the Paulson plan is a ``non-starter'' because of competing agendas and coordination difficulties, Klaus Baader, chief European economist at Merrill Lynch and Co. in London, said in a Sept. 29 report. Still, he expects increased cooperation among governments confronting the crisis.

French President Nicolas Sarkozy may propose the bailout fund at an Oct. 4 meeting that Luxembourg Prime Minister Jean- Claude Juncker said he's attending with leaders of Great Britain, Italy and Germany, as well as European Central Bank President Jean-Claude Trichet.

The proposed fund would total 300 billion euros ($422 billion), Reuters reported, citing an unidentified European government official.

Lagarde, speaking at an event in Paris last night, disputed that figure, without saying whether it would be bigger or smaller. Henri Guaino, a special adviser to Sarkozy, said in a telephone interview that ``France has neither studied nor proposed a plan of that type to its partners.''

The specifics of a coordinated plan notwithstanding, Germany rejects a Europe-wide approach to bank rescues, said Albig, the finance ministry spokesman.

`Tailor-Made Solution'

``The idea of applying one solution, one big bang'' should the banking crisis spread ``is not practicable and would create new, enormous problems,'' he told reporters yesterday in Berlin. ``The tailor-made solution is the right way.''

That contrasts with pleas from European Union officials for less unilateral action. Charlie McCreevy, EU financial-services commissioner, yesterday proposed more coordinated oversight and rules that banks hold more capital for asset-backed bonds.

``Capital and strong financial institutions are the lifeblood of an economy,'' McCreevy said in a Bloomberg Television interview in Brussels.

As banks hoarded cash, the London interbank offered rate, or Libor, that banks charge each other for one-month loans in euros climbed to an all-time high of 5.07 percent yesterday. The equivalent dollar rate surged to the highest level since January, the British Bankers' Association said. Overnight dollar loans slid from a record of 6.88 percent after funding constraints tied to the end of the third quarter passed.

The credit-market turmoil may require a more comprehensive approach in Europe, the Organization for Economic Cooperation and Development said yesterday.

``Considering the exposure of European financial institutions, we might have to start thinking of a systemic plan for Europe if things don't improve on the other side of the Atlantic,'' OECD Secretary General Angel Gurria said in Paris. ``The piecemeal approach may not work in Europe either.''

To contact the reporters on this story: James Hertling in Paris at jhertling@bloomberg.net