Not flush, just Gordon

Perhaps Gordon Brown should travel more often. The lugubrious British prime minister, out of sorts at home and seriously adrift in the polls, has been styled as a swashbuckling conductor in the Spanish press and a magician in France. Europe has apparently bought into Mr Brown’s conviction that this is a severe but transient crisis of confidence that can be overcome by piling on more and more government debt.

While the wisdom of that strategy is questionable, it is clear that there is strength in numbers. If governments all muck in together, using taxpayers’ money to recapitalise banks while providing guarantees on new debt issuance, they sacrifice their balance sheets en masse. Some budget deficits will widen more than others. But if they cock a collective snook at fiscal rules and targets, they will discourage capital arbitrage within the European Union while shielding themselves from the kind of targeted punishment that did for Iceland.

Collusion on such a vast scale is risky. Governments will have difficulty unwinding bank shareholdings when the time comes. Some countries could adopt inappropriately stimulative policies to address the slowdowns in lending that bank nationalisation will bring. Deutsche Bank estimates that Spanish and Irish banks would have the biggest immediate shortfall in capital if they were to return leverage ratios to the average of the past 10 years. But no finance minister writing cheques will get off lightly. A recent International Monetary Fund study of 124 historic banking crises shows that they cost, on average, 13 per cent of gross domestic product once the full effects of fiscal drag are factored in.

Yesterday, interbank lending rates within the eurozone fell from their record highs last week while bank credit default swaps tightened. But balance sheets still need to be shrunk and business models torn up. Oversight will intensify and earnings will surely deteriorate, as the European debt cycle has barely begun to turn sour. Stability is one thing, confidence another

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