Europe surprised at Bank of England's rescue of Northern Rock

By Tony Barber and Gillian Tett
Financial Times, London
via Yahoo News
Friday, September 14, 2007

http://news.yahoo.com/s/ft/20070914/bs_ft/fto091420071829453431;_ylt=AgB...

Continental European policymakers reacted with surprise to the news that Northern Rock was being bailed out, suggesting that the Bank of England had taken the decision to act without extensive consultation with its European partners.

Many were particularly surprised, given the strong stance taken by Mervyn King, the governor of the Bank of England, on providing liquidity to banks. On Wednesday Mr King said the bank would not engage in a bailout of troubled institutions unless it had systemic implications.

European Central Bank policymakers have indicated from the start of the crisis that it is imperative to provide as much liquidity as the market needs to maintain stability. However, the Bank of England took a different stance and refrained from injecting unusually large amounts of funds, arguing that the problem reflected a crisis of confidence among private lenders rather than a lack of cash in the system as a whole.

The sense of surprise could exacerbate tensions that have been developing in recent weeks about how best to handle the credit crisis.

While avoiding direct criticism of the Bank of England, Jean-Claude Trichet, the ECB president, said: "We have different instruments that are traditionally utilised in New York, in the euro area, and in the UK ... I would say that all central banks that I know have done well under the circumstances."

Mr Trichet had no immediate comment on the Bank of England's rescue of Northern Rock. But he said: "What is important is that we must not let the mistakes made by some impose on those that made no mistake a high price."

Other EU officials attending a meeting of EU finance ministers in Porto said the bailout had come as a surprise. "We had no idea this would happen," said one eurozone official.

However, Mr Trichet was eager to play down any sense of a rift emerging between the European and the UK central banks. "I never say myself that I have a different view to that of the Bank of England," he said. "Each of the central banks in the world has its own response when trying to ensure price stability and anchoring inflation expectations."

The different responses are likely to make money-market liquidity a hot topic when the Europe's central banks meet in London next week as part of the scheduled debate about the Basel II bank reforms.

Politicians and central bank officials across Europe were keen to avoid criticising the Bank of England. Brian Cowen, finance minister in Ireland, where Northern Rock has 24,000 depositors, said: "A lot of reassurance has been provided by the statement by the Bank of England. It is important to point out that Irish depositors' deposits are safe. I think it's a question of the regulatory regime showing that it's working in this situation," he said.

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