Defaulting banks - where will it stop?

[Jan Klimkowski]

But there's a big Teutonic problem:

http://online.wsj.com/article/SB12359143...od=testMod

* MARCH 1, 2009, 4:51 P.M. ET

European Union Rejects Call for Eastern Europe Bailout

By PAUL HANNON and LEOS ROUSEK

BRUSSELS -- Some eastern European leaders on Sunday joined Germany in opposing the establishment of a European Union fund to bail out countries in the region, despite signs of growing financial strains in their countries.

Concluding their summit here, the leaders from the bloc's 27 countries also said that first steps to reform the EU's system for regulating and supervising banks should be taken by early June.

Hungary came to the summit urging a €190 billion ($242 billion) aid package that would provide central banks in central and eastern Europe with much-needed euros and help fund and recapitalize commercial banks.

Germany, the EU's biggest economy, firmly opposed the proposal. So did some eastern European governments, fearing it would lead to the partitioning of Europe along economic lines. Some western EU economies are just as financially threatened, they said.

"The situation is very different" in Europe's economies, German Chancellor Angela Merkel said. "We cannot compare Slovakia nor Slovenia with Hungary."

Merkel said that countries could still receive aid on a country-by-country basis.

In presenting the plan, Hungarian Prime Minister Ferenc Gyurcsany warned that without aid, a new "iron curtain" would descend, once again separating east from west.

But other eastern European leaders argued that not all of the economies in the region face the same problems as Hungary, and in some cases, western European economies are in greater difficulty.

Setting up a fund just to aid eastern Europe would effectively split the bloc in two, they argued.

"I don't believe it is necessary now to separate countries in eastern Europe from the rest of the EU," said Czech Prime Minister Mirek Topolanek.

Polish Prime Minister Donald Tusk said that while it was important for EU members to demonstrate solidarity, that must be applied for the whole of Europe.

"Our position is that we must differentiate between countries that are in difficulties and those that are not," Polish Finance Minister Jacek Rostowski said.

"We are in favor of supporting countries in need, like Hungary," Rostowski said. "But there are a number of countries in central and eastern Europe that are not in need, such as Poland, the Czech Republic, and Slovakia. And there are countries in the euro zone that need help."

In their closing statement, EU leaders said they recognized that there were "clear differences" between eastern European members.

Western European members also agreed that in providing support to their own banks, they don't prevent those funds being used to help their subsidiaries in eastern Europe.

"Support for parent banks should not imply any restrictions on the activities of subsidiaries in EU host countries," the EU leaders said.

According to the statement, the leaders committed to "getting the real economy back on track by making the maximum possible use of the single market, which is the engine for recovery."

They also said that restoring credit flows is crucial if the fiscal stimulus packages announced by the various EU members are to stimulate demand and aid the recovery.

When formulating plans to deal with "impaired banking assets" -- otherwise known as toxic assets -- governments must ensure that they don't give their banks an unfair competitive advantage, the leaders agreed.

On bank regulatory reform, a high-level European panel last week called for the creation of a new regional supervisory council responsible for monitoring broader systemic risks, and for a gradual harmonization of regulatory rules within the EU.

The panel recommended leaving the day-to-day regulation of banks and other financial institutions to national regulators, in a move that disappointed some European policy makers who envisaged a central regulator.

In their statement, EU leaders said they "welcome the contribution" made by the panel.
—David McQuaid, Gabriele Parussini, Peppi Kiviniemi, Carolyn Henson, Matthew Dalton and Alessandro Torello contributed to this article.