Crisis could be at a global tipping point

WASHINGTON - Barely a week after Europeans rebuffed American pleas to join in their bailout of the banking system, Europe now faces a financial crisis almost as grave as that in the United States - demonstrating how swiftly this contagion is spreading around the world.

In the last week, governments from Dublin to Berlin have seized or bailed out five faltering banks.

In Ireland, where rumors of panicked withdrawals from banks spooked the stock market, the government has instituted a two-year blanket guarantee on all deposits and bank debt.

Asia has been less buffeted by the turmoil, though a brief run on a bank in Hong Kong last week brought back dark memories of June 1997, when a speculation against the Thai currency sparked a financial crisis that fanned rapidly across Asia, and later to Brazil and Russia.

Economists see a parallel between these two crises a decade apart: once creditors panic and begin to pull out their holdings, the underlying health of banks - or entire countries - no longer matters a great deal. In a global financial system, national borders are porous.

"In this day and age, a bank run spreads around the world, not around the block," said Thomas Mayer, the chief European economist at Deutsche Bank.

"Once a bank run is underway, it doesn't matter anymore if you have good loans or bad loans. People lose confidence in you."

In a sign of how vulnerable Russia remains to contagion, officials halted trading on the Moscow stock exchange for two hours on Tuesday morning, fearing how investors would react to the House's rejection of the Bush administration's bailout plan.

"People ask, 'What on earth is happening with Russia?' " said Roland Nash, chief analyst at Renaissance Bank in Moscow. "Russia is reacting to the unprecedented size, complexity and danger coming out of the U.S."

The shock waves could reverberate to the United States, experts said, since Russia has plowed its oil wealth into American debt, including Fannie Mae's. Russia has additional problems, including unstable oil prices and a newly assertive foreign policy that is unpopular with many investors.

The trigger for the loss of confidence in Europe, Mayer and other experts said, was the Treasury Department's decision two weeks ago to let Lehman Brothers fail. That ricocheted through European markets, hurting banks and retail investors with exposure to Lehman.

It took a few days longer for Europeans to digest the implications of the collapse. But now that they have, they are turning a remorseless eye on other institutions they suspect of being vulnerable.

As the White House scrambles to retool its rescue plan for the financial system, the global creep of the crisis has far-reaching implications, administration officials and outside experts said.

It is likely to move Europeans to mount a more coordinated effort to shore up banks, which the Treasury secretary, Henry M. Paulson Jr., pleaded for last week.

"We all agree that the method by which everyone comes up with ad hoc solutions in his corner the moment a crisis starts in a financial company isn't a systematic enough method," said Prime Minister Jean-Claude Juncker of Luxembourg, who chairs a group of European finance officials.

On Tuesday, France and Belgium threw a $9 billion lifeline to Dexia, a Belgian-French lender - a day after Belgium, the Netherlands, and Luxembourg cobbled together $16.2 billion to rescue another bank, Fortis.

Europe's woes could place additional burdens on an American plan, as more banks fall into distress. If the Treasury wins congressional approval to buy mortgage-related securities from banks, how it prices those assets will affect the solvency of European institutions.

Some of these banks suffer a form of guilt-by-association by being in the home-lending business. Others, like Fortis, lack a strong base of deposits, which act as a buffer against credit-related jitters.

Countries that suffered housing bubbles - like Ireland, Britain, and Spain - are especially vulnerable, as are several Eastern European countries and other emerging markets, which are running steep current account deficits and low foreign currency reserves.

Ireland's finance minister, Brian Lenihan, traced his country's predicament back to Lehman Brothers, saying that the American authorities "were mistaken in permitting that bank to go to the wall because it has had very serious consequences for the world financial system."

The Irish plan guarantees bank deposits and debt for customers and creditors of six banks. That puts the government on the hook for $400 billion, twice the country's economic output.

Experts predict a rash of further bank failures in Europe, though some say the process may prove less politically fraught than in the United States, given the tradition of nationalization there.

"The Europeans are more rigid and rule-based than the Americans," said Simon Johnson, a former chief economist at the International Monetary Fund. "But when things get bad enough, they'll find the flexibility."