Sunday, October 12, 2008

Europe Agrees to a Bailout Plan

European governments announced an agreement on a bailout plan. Here is an article that describes the agreement. The plan includes recapitalization of banks and a guarantee of interbank lending. It is clear that markets were worried about the lack of a plan, and this announcement may be good news Monday morning. Of course we will want to see more details in how this works. It seems that the details of many plans are rarely as good as the announcements. In particular, as Floyd Norris notes, "they left it up to each nation’s government to provide details of how its own banking system would be protected."

The plan asserts that it will “support systemically important financial institutions and prevent their failure.” But it is not clear which institutions will qualify as such. More important, this may not free up interbank lending if one of the banks is clearly not "systemically important."

But this action still seems to be a good step.

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