EU KETTLE BOILS OVER BY $24 TRILLIONS OR 0VER 40% OF EU BANK BALANCES - DON'T BELIEVE IT!

This essay follows on from that of the third one below this.
This week just gone saw explosive estimates in a secret 17 page document seen by the press. A bail-out of the toxic assets held by European banks' could plunge the European Union into crisis, according to a confidential Brussels document. European Council meetings are immensely secure - it is very rare for key documents to be leaked. Our Contintental partners will be asking themselves whether UK oficials deliberately leaked the secret document? It says things like: “Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” as seen by The Daily Telegraph. I smell a rat - a con-job? And, "It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”
The "secret 17-page paper" was discussed, it is claimed, by finance ministers, including UK Chancellor Alistair Darling in brussels on Tuesday. National leaders and EU officials fear that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back. I don't doubt some that is reasonable to state, but scarcely news or at all alarming, not until the numbers that The Telegraph reports were in the paper (later removed from the website?)
The Commission's figures, if that is what they are, are significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets by the end of this month when new moves to bail out banks will be discussed at an emergency EU summit. The EU is also very concerned by widening spreads on bonds sold by member state countries. In line with perceived default risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany or Greece instead of France. Ministers and officials fear that the process could herald a spiral that threatens the EU's wider, and Eurozone's narower, integrity. The secret paper supposedly says, "Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance.” And the Teleraph says, Toxic debts of European banks risk overwhelming a number of EU governments and pose a “systemic” danger to the broader EU financial system.“ If I may digress for a moment - It is not inappropriate for an organisation such as the UN, IMF or in this case, the EU, set up to provide the economic cooperation needed to secure long term peace, to remind ourselves of why Versailles failed in 1919 after WW1. The two greatest economists of the age, J.M.Keynes and A.A.Young both resigned in protest, and Keynes wrote the best-seller "The Economic Consequences of the Peace." The argument was that seeking proportional reparations would prolong the economic mess that led to war and one could not predict what extremities people would go to to get out of their misfortunes. His advice was taken thorough account of after WW2 and the world experienced exceptional growth and rising prosperity. Of course, wars were not banished and enormous problems persisted. But, similarly again now, when G20 is in effect setting up a system for a new financial world order, both to get out of the crisis and then to create a sustainable world economy, great care has to be taken to ensure conditions are not created for future extreme crises much as WW1's Versailles led to WW2. There are already, in Europe and the USA and in many other parts of the world extreme assumptions of the total collapse of the financial system, of the EU, of the economies of China, Africa and so on. The secret 17-page paper appears in how it has been characterized by The Telegraph to fit that anxiety-bill.
It says that estimates of total expected asset write-downs suggest that the budgetary costs of asset relief could be very large both in absolute terms and relative to GDP in member states to the extent that the ability of the EU to survive is threatened! It supposes that for some member states, it may be the case that asset relief for banks is no longer an option, due to their existing budgetary constraints and/or the size of their banks’ balance sheet relative to GDP. Ireland, for example, where voters are still expected to vote against the new EU Constitution despite the fact that the main banks are all sucking on the liquidity teats of the ECB for survival. Yet, if the UK was to allow the Irish banks access to its liquidity window the cost would be a relatively trivial addition to the asetts for treasuries it is already doing for UK banks. Unfortunately in the Eurozone, only the ECB can issue short term roll-over treasury bills off-budget from a national debt point of view. The situation demonstrates a valuable monetary lever available to the UK that would be much less so had the UK joined the Euro system. The UK is also enjoying no deflation threat due to its exchange rate having fallen by about 30% and its persistent inflation (currently about 3%) is an additional help in paying down debts.
The extent of any risks to the EU banking system as a whole from an inadequate response in these member states needs to be considered, particularly in the case of cross-border banks. No country is named in the so-called 'secret paper', but obvious candidates might be Greece, Ireland, Luxembourg, Belgium, the Netherlands, Austria, Sweden, Spain, and UK, and non-EU member Switzerland, which have large banking sectors relative to GDP or have sold proportionately large amounts of asset-backed securities. EU banks hold balance sheet assets of €41.2 trillion (£36.9 trillion). But, it seems to me that the toxic assets are a market price problem, not yet a problem of low income, not credit risk defaults to the extent that these assets are not paying substantial yields. The problem is more that of accounting for the market price writedowns on banks' books - so take them off into the Bank of England or bad bank entities, leaving the real cash-flow problem being funding the banks' funding gaps between customer deposits and customer loans. This gap is well within the financial means of EU governments and the ECB. Brussels refused to comment on the paper, but it is clear that officials are concerned about default risk in the weaker states where interest spreads on government bonds are widening most. The IMF has questioned the lack of a proper 'lender of last resort' in the eurozone, although it is more so than the current G20 plan for the IMF's similar role globally. The European Central Bank (ECB) is, however, not allowed to bail out individual states. National goverments' 'central banks' within the Eurozone (Euro single currency) countries do not control national monetary levers given that treasury bills, repos etc. (open market liquidity operations) and central bank interest rate are an ECB responsibility. The concern about the ECB being less than a full central bank because it lacks a less than full political master, i.e. a less than full federal government, is an old saw that is unlikely to be resolved anytime soon. Therefore, the ECB is especially sensitive to how well it and the Euro financial system are seen to survive its first full recession test.
The IMF says C.European and UK banks have 75% as much exposure to US toxic debt as US banks, yet have been slower to book write-downs ($738bn in the US, $294bn in Europe, $260bn short?) Global banks have so far written down half of the $2,200bn losses estimated by the IMF. On top of this, EU banks have another $1,600bn depreciating asset exposure to Central and Eastern Europe, viewed by some as Europe’s sub-prime over-indebted poor. EU corporate debts are said to be 95% ratio to EU GDP compared to 73% ratio in the US, a mounting concern (as default rates reach 6.7% in the US, with S&P forecasting 23% by 2011 and the fear this may be repeated in Europe). But, these are default rates for speculative grades only and will only be experienced in the bottom 25% of corporate debts. The EU secret document also highlights the “real danger of a subsidy race between member states” if countries start to under-cut each other in the way they value toxic debts in their `bad bank’ rescue programmes. Whenever the word "race" appears in a communitaire economy context it means "race to the bottom". The fears is that of covert state aid, undermining the single 'fair' market integrity of the EU. Actually, it pays no country to seek to under-cut or outpace the others since the benefits leak out via the external account. Therefore, commonsense should dictate that all countries coordinate their economic recovery reflation measures at roughly the same pace, the same ratio proportions to GDP. But, no-one wants to risk going at the pace of the least fiscally Keynesian, except the least fiscally Keynesian, Germany and Austria!
An explosion of budget deficits and national debts ratios are also feared. The budget deficit will hit 12% of GDP in Ireland next year and almost 10% in Spain and UK, no doubt others too. Therefore the secret paper says, “It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems. Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance.”
It is not surprising that European Union finance ministers looked ashen faced in Brussels on Tuesday and will do so again today in Berlin where EU leaders have agreed the agenda for their contributions to the London G20 conference and this turns on a global financial regulator authority - something many of us imagined existed in the BIS, bu is to be backed by the IMF in the role of a central authority with substantial funds. Last Tuesday's coffee & croissents or madelaines with confitures Anglaises breakfast meeting discussed how EU governments should deal with "toxic" banking assets that all accept triggered the economic crisis, but by Sunday, today, this has transmuted more towards regulatory supervision and transparency. The figures in the secret EU Ecofin Commission paper, are startling. The dodgy financial assets are estimated, according to The Daily Telegraph, to total £16.3 trillions (€15 trillions, $20 trillions) in banks across the EU. The "impaired assets" may amount to an astonishing 46% of EU banks' loan-assets, which is in reality wholly as improbable as it is astonishing. Who produced these estimates, digging a deep ditch for bankers, regulators and friends in government to stumble into.
The secret 17 page paper, according to The Daily Telegraph, warns that government attempts to buy up or underwrite this scale of assets could plunge the EU into a Union-threatening deep crisis. This is equivalent to saying that the EU and Eurozone are equivalent to Iceland or Ireland in having a banking sector dispoportionate to what the economy can afford? It is like saying we cannot afford our banking system, much as has been said for years by anti-welfare state ideologues, about social services, state health and education (typically all three added together being 60% of government spending budgets). The anti-welfare state economists were just as piss-poor at macro-economics as the the authors of the secret paper appear to be - in fact I am forced to seriously doubt its authenticity, maybe another Hitler's diaries scam?
The Telegraph says everyone is terrified that a second bank bailout will push up government borrowing at a time when bond markets have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain, to service and repay their borrowings. This is so ludicrous, worst kind of scare-mongering, based on upticks in government bond spreads that reflect the cost of capital elsewhere more than genuine perceptions of government solvency! This is typical of interpretations invented when mathematically-minded, economically-ignorant, analysts are forced to explain a number! The 'secret document' says, "Estimates of total expected asset write-downs suggest that the budgetary costs - actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states." These adjectives are relative terms and have to be sized over time, over the credit and economic cycle. There are no known actual absolutes involved. War economies showed us that much; cost is a matter of spreading over time time against present emergency urgency. Spread yields are widening on bond markets as investors apparently judge it riskier to buy the debt of a country like Italy than the debt of another like Germany. The fact is that these securities are a seller's market and there is a juggling of perceptions going on to dissuade governments from appreciating this. Such juggling is a time-honoured tactic ahead of known large government bond issues.
In line with the risk, and the low performance of some EU economies compared to others, the markets have demand a higher premium on government bonds issued to raise the cash - so says the Telegraph and others. Well, when banks are forced to buy and hold more than the 50% they usually buy this time round an desperately need the 'gilt-edged' bonds to rectify their capital quality - governments need take no notice and need not cave in to discounting face values. As Sarkozy might say "nul points". The secret paper is fuelling this concern, "Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance."
Reasons for doubting the report is that it had its numbers removed after first appearing on the Telegraph website. What began as a secret 17-page report circulating among European Union finance ministers warning EU governments that toxic assets still held by EU banks and investment firms could total a massive £16.3 trillions or $24.4 trillion, and that Commission officials estimated as "impaired assets" = 44% of total EU bank balance sheets, was later sanitised by removed the numbers calling them merely "massive". I suspect this figure of £16tn/$24tn is a funding gap figure (not toxic assets at all) and a transposition from the 40% funding gap of UK banks to EU banks. One reason for disbelieving the numbers, quite apart from their rediculous scale, is that last week numbers circulated in Wall Street estimated U.S. bank toxic assets at $9 trillions. Frankly, also rediculous. $2 trillions each (my calculations) is the realistic ballpark figure on both sides of the Atlantic, with $2.8tn booked as impaired credits by October 2008, according to the Bank of England. Writedowns by Nov 2008 were over $710bn by banks worldwide and capital raising was $760bn roughly both aligned by world-region distribition (ECB Stability Review). Deleveraging by Euro Area banks required is estimated at €560bn (3% of all assets, 9% of customer loans, €19tn), of which the ECB has mitigated so far by half by providing liquidity to banks. Euro Area bank funding gap is roughly €4.5 trillions. The ECB is perplexedly not brilliantly specific about this. The banks' funding gap of Central and Eastern Europe supplied by EU banks is about €1.2tn only, not insupportable. I reckon that the Telegraph's figure of £16.3tn for toxic assets is actually 16.3% ratio to all of Europe's gross banking assets that are European banks' funding gap, that portion of their liabilities that are interbank borrowings, €1tn for UK banks, €4.5tn for Euro Area banks, €1.2 tn for C&E Europe and others. This makes me even more convinced the Telegraph story as originally put out is some kind of anti-EU malevolent concoction?
I got back late from Berlin today with my head full of figures only to find that Number 10's website had the story in its least quantitiative version: "European leaders meeting in Berlin today, ahead of next months G20 Summit in London, have agreed to the need for fundamental changes in the world’s economic systems. At a joint press conference following the meeting the Prime Minister called for a “global new deal” to aid the recovery of the world economy and provide a set of principles for a sound future. The “grand bargain” would involve global economic and fiscal stimulus, global financial control mechanisms and be based on sound banking principles. It would require the strengthening of international financial institutions and help deliver a low carbon economy, he added. The PM said: “We are resolved that global problems need global solutions. And we will work together over these next few weeks to make sure that by our co-operation and our determination to act together we can not only inject the confidence that is necessary in the world economy but also build anew the economic activity that is necessary for the jobs, for the security that the people of the world want.”
"The Prime Minister will travel to the United States next week to discuss the world economy with President Obama. On 1 April world leaders will meet in London for the G20 Summit to continue the work begun in Washington last year."

PRICE THE STOCK BY THE FLOW?

On both sides of the Atlantic Cable that first tied UK and USA financial markets and stock exchanges and then Continental Europe's too, that today has somehow determined that systemically important banks (economically vital), from that of Fifth Third Bancorp to Lloyds Banking Group, to Royal Bank of Scotland, Unicredit, Fortis, and others, the banks' share prices are the price of postal stamps and bank capitalisation is a mere fraction of book value; in effect the shares are more like 'options' and the actual 'options' must therefore be the best market bets going, so good in fact that short-sellers like UK hedge fund Odey (up 42.5% in $ terms last year) is now going long on such banks. Maybe they are anticipating a change about to be permitted to mark-to-market pricing standards, something probabilistically determined using the forward-looking dimensions of the new accounting standard IFRS7?
What does marking assets to market prices mean. It means pricing the stock far below the valuation that can be justified by net income to the asset just as in the case of major banks. For example, the prices of assets on the books of Washington Mutual, when it was bought by J.P. Morgan at a fire-sale price, were cited as a reason to mark-down the assets on the books of Wachovia. This, some say, forced the FDIC /Federal Deposit Insurance Corporation) to arrange Wachovia´s sale to Citibank even though these banks are cash-flow positive. Similarly,Fannie Mae and Freddie Mac, had positive cash flow when they were nationalized by the US Treasury. Fannie Mae and Freddie Mac have not yet actually had to draw down a dime from the Treasury's $200 billion facility that was created to bail them out. It was the use of mark-to-market accounting that allowed Treasury to declare them bankrupt when on a cash flow basis, they are solvent. Mark-to-market accounting causes mayhem for tried and tested accounting standards reasons, but with the awkward and often devastating proviso that financial firms are forced to treat all potential losses as if they were current cash losses, and indeed this is how the general public, including many shareholders, perceives all loss announcements. Even if the firm does not sell at the excessively low price, and even if the net present value of current cash flows of these assets is above the market price, the firm must run the loss through its capital account and into its P/L bottom line statement for loss provision, hitting dividends and tax provision. If the loss is large enough, then the firm can find itself in violation of capital requirements. This, in turn, makes it vulnerable to closure, nationalisation or forced sale. My stamp is my bond? Some large banks' shares are the price of postage stamps and their stock market trade-price is close to one year's net profit, even with G20 governments guaranteeing the banks' long term solvency! The news media informs and reflects widely held opinions of bank bonds (backed by assets comprising our loans and repayment schedules) that they're worth even less than postage stamps, certainly less than gold or diamonds that also pay zero income. It is possible to joke that postage stamps are rising in value: buy now and they are good to 'hold' for an annual 8% return? Are bank shares good to 'hold'? Medium to long term they must be.
In the short term now too maybe, if further dilutions by rights issues are avoided, and certainly if cash-flows can be decoupled from mark-to-market asset write-downs. This is the idea of assets valuations based on 'hold to maturity', and shifting assets from trading book to banking book, or the idea again (now called 'bad bank') of getting assets with below book value prices off the balance sheet, and so on, such as swapping toxic assets into bad banks or at central bank liquidity windows via SIVs or any form of medium to longer term warehousing, i.e. de-coupling cash-flow P/L so that banks share price valuations can move closer to banks book value (even if the latter is written-down, short or medium-term discounted by recession, cyclically) and if solvency is considered on a cash-flow basis, then bank shares must have tremendous up-side. But, the political authorities are reluctant to permit massive shareholder 'regains' (unless government or perhaps pension fund shareholders only?) If fiscal measures by US, UK and other governments deliver firm signs of recovery by 2010 (maybe with advance indicators in 2nd half of 2009) then the 'upside' potential of bank share prices becomes a powerful certainty!

FUNDING OF FISCAL RESPONSES TO THE CRISIS

Solving the combination of credit & economic cycle recessions together amounts to doubling of our recent past experience of economic recessions. The solution has to be about restoring confidence as much as about restoring solvency. Trying to do just enough to win through may be foolish risk-taking. We can see this to be more like a war-economy situation where the only sensible risk-taking is to do as much as can be done and therefore much more than enough to win through.
Just as in wartime, it is essential that when trust in all else fails we do not lose trust in democratic governments too! There are far worse consequences than trusting in government, however flawed their efforts might be. It is my considered view, however, that remarkably our governments are doing a surprisingly intelligent and good job. Any of you luxuriating in angst and anger who wish to strike blows in all directions - you're being dangerously wrong-headed!
I task you with the quesion: what is the importance of not losing trust in what governments are doing and can do? I suggest that when trust is lost in banks and so much else, we have to be able to trust in government actions in this crisis for fear of far worse consequences when all trust is lost! In this respect is it not unlike wartime conditions where however flawed the Churchillian or FDR leaderships might have been, for example, they pulled together the national effort? While I don't want to make a party-political point, this is where the UK Conservative front benchers are mistaken in playing yah-boo politics. Would Labour Party have done the same in WW2 had it not been part of a National Unity government? I don't think so? But, it is undoubtedly with such thoughts that Obama is trying in the US to "reach across the aisle".
Overwhelming much else, more and more, is the immensely dramatic change to the pattern of world trade and financial flows, and this is also why Governments need to over-shoot in their measures. We could say we (Governments, and banks too) need to attempt a 'shock recovery', almost shoot first, ask questions later. And that means forcefully countering those who either emotionally or for carpet-bagger vested interest reasons oppose trying to restore as much as possible the map of how matters stood before the crisis. We can assess how much and where we can risk a clean break with the immediate past? In solving the banks liquidity risks, Governments can supplant as counterparty (and then as market intermediary) all of interbank wholesale funding of banks 'funding gaps' and also eventually bring credit and money markets on-market into regulated transparent credit and money markets. Part of the problem undoubtedlky was that these were off-mnarket, in 'over-the-counter' trading. This is not beyond governments financial resource to do so and would leave the previous sources of wholesale funding begging to get back into this profitable market - a good result for restoring balance to money and credit markets.
But, it cannot be accomplished if governments liquidity and SLS type measures are not transparent (e.g. The UK 2009 Banking Bill that permits non-disclosure for at least 6 months of precise details of government funding of the banks).
A related matter is that even the FT as well as all other media have failed to pick up that by law government holdings of commercial banks when over 50% are outside of regulatory supervision laws (CRD Basel II, Solvency II, IFRS etc.) and outside of the Companies Act and codes of conduct etc. This is clearly established at EU law by the Irish nationalisation of Anglo-Irish Bank and now applies to NR, B&B and RBS. (And similar is true of Fortis, ABN AMRO, and in USA of AIG, FM&FM etc.) Some assurances are needed here that regulatory supervision will continue in these cases!
Above all, the public want the reassurance of a clear statement of the game-plan. It is not enough that this game-plan is now diverted into the G7 and G20 agendas.
In my analysis of what's happening is as follows: banks generally in both UK and USA, and elsewhere, are losing twice their reserve capital, once to the credit crunch, once to the recession. Governments are replacing one times capital reserves and so far one quarter to one third of 'funding gaps' plus guarantees of deposits & bondholders. Banks have to recover one times capital reserve from recoveries and one times capital reserves from selling off business assets from which they can redeem government bank share investments (and will be anxious to do so before their share values rise sharply sometime in the medium term).
But, where are government measures in this to assure that banks will not endanger recovery by deleveraging, acting powerfully pro-cyclically? That, I believe, is to be found in the now long-run (not temporary) liquidity funding by central banks of banks 'funding gaps' - the reason why securitisation of bank assets has gone up dramatically in 2008 and will continue to be historically high in 2009!
This, so as to pledge the bond collateral with central banks as 40-50 year maturity paper (as in the UK, where this collateral after 25% discounting is pledged for 3 years holding periods in exchange for Treasury Bills, but this is likely to be prolonged beyond 3 years, and 3 years is now the US holding period too, up from 1 year) i.e. these are very long term Covered Bond, MTN and SIV funding programs under which the underlying loans are topped-up continually, replenished, rolled over. On this basis lending levels by the banks should be restored and maintainable.
In fact, we can envisage that insofar as all this government liquidity infusion is off-budget, the dividend & coupon revenues to Government are of sufficient size to balance US Federal and UK General Government budget deficits after 2009! Thus, there is a shift from private financial sector profit to Government profit to pay for the fiscal impulses.
If this framework is publicly recognised and managed intelligently that is a prudential way out of the mess.

EU emergency anti-crisis summits

The EU has scheduled two emergency anti-recession summits ahead of the London G20 and G7 in an effort to suppress protectionism, sustain employment and prevent the bloc’s political fragmentation into old and new member states. EU heads of state and government will convene in Brussels on March 1 to discuss their latest steps to counter the financial sector crisis. They will meet again in Prague in May after the G20 to consider the recession’s impact on the 27-nation bloc’s labour market. This is in addition to a previously scheduled summit of EU leaders on March 19-20 in Brussels that will also deal mainly with economic issues from the G20 agenda for which the Commission has a large number of high priority tasks to progress.
“Only by co-ordinated and united action will we overcome the crisis. The internal market is the vehicle that will drive us out of it,” said Mirek Topolanek, the Czech PM, after talks with José Manuel Barroso, EU Commission President. The two announced the summits to limit the fall-out from a clash between French (outgoing 6 month Presidency) and Czech leaders (incoming 6 month presidency) that exposed cracks in EU unity just as the EU has to find a common united voice for the G7 and G20 about how to usher in a new financial world order and the most serious global economic difficulties in EU history.
The not at all plain fact is that while financial flows in most of history followed trade flows, and then were decoupled when major currencies all freely floated post end of Bretton Woods, there followed the fast growth but severely unbalanced trade patterns of the past 20 years requiring financial flows to be provided as packaged up financial assets (commercial bank securitisations etc.). Half of US structured products were bought by its foreign trade counterparty surplius countries such as China, Japan, Korea, and the EU, about $1.2 trillions.
The collapse of these securities, dramatic changes in exchange rates and energy prices over the past year, recessions etc. all have caused a massive re-orientation of world trade patterns. Most countries are totally lost in knowing what their extrnal accounts are going to be. We see this for example recently in Russia where a large fiscal stimulus was abandoned as the Government could see its foreign exhcnage reserves rapidly falling and the necessity to support its banking sectors external obligations with the necessity of buying in toxic debts!
The Czech views reflect to some extent that of central Europe where trade and investment flows with the EU have dramatically worsened. “My feeling is that this is something that’s very damaging to both of us,” Mr Topolanek said of his row with Nicolas Sarkozy. “We haven’t dealt with it in person because, frankly, it wasn’t worth it. Now I’ve learnt a lesson. It’s better to call each other up.” The dispute broke out last week when Mr Sarkozy suggested that French car manufacturers operating in new EU member-states, such as the Czech Republic and Slovakia, should switch production to France and protect French jobs. Tensions rose on Tuesday when Mr Topolanek accused unnamed eurozone governments of “deforming” the project of European monetary union with misguided responses to the financial crisis. The quarrel will become a broader conflict between the EU’s older, western European countries, most of which use the euro, and the newly admitted states of central and eastern Europe. This is a problem with a long history. The EC/EU has been traditionally weak or less effective than it should and could have been in addressing economies across its borders compared to the USA and Mexico for example, though mjatters can be strained there too. In the past this was explicable given that across EC/EU borders were either Soviet states or Muslim states which each had obstacles to capitalist development. Aid was more effective in sub-sahara Africa and in trade with OPEC and further afield.
Now within the EU there is a large group of central European states, most outside the eurozone and more vulnerable to severe financial disruption the longer the crisis persists. “Already we can see small countries entering into problems with liquidity, as the price of their bonds decreases and they are not able to sell them,” said Mr Topolanek, whose Czech Republic took over the EU’s rotating presidency from France on January 1. The Czech Republic is also angry and frustrated at the disapproving noises heard in certain western capitals about its weak leadership in the financial crisis. France's €6bn aid plan for the French car industry with attaching non-communitaire conditions is in breach of the free market, and Mr Topolanek's presidency has a right to reprimand France for this - hence the row - saying the real division in the EU was between “those who think it’s possible to violate the rules right now, and those who think it’s not, and I’m one of the latter”. Mr Barroso, striking a balance between support for France and defence of the EU single market’s integrity, said: “We must not let our industries perish because of a temporary downturn ... But we will need to scrutinise very carefully the details of the [French] subsidies.” He added: “All over the world there’s a real threat to the global economy from economic nationalism and narrow protectionism. We must resist this temptation. If one country decided to go it alone and take unilateral measures, others might decide to do likewise. But I reject the idea that it is a specifically European problem.”