EU bank rescue of US$5.3 trillion costs more than Germany's GDP

The UK pledged 781.2 billion euros (US$1.1 trillion) to restore confidence in its lenders, the most of any of the 27 EU members, according to a May 26 document prepared by officials from the European Commission, the European Central Bank and member states and obtained by Bloomberg News. Denmark, where 13 of the country's 140 banks were bailed out by the central bank or bought by rivals last year, committed 593.9 billion euros.

The measures, designed to save banks and revive economic growth, surpass Germany's US$3.3 trillion economy, the region's biggest. They also helped to widen the Euro area's budget deficit to the most in three years in 2008.

The commission, the EU's executive arm, is seeking to create the first EU-wide agencies with rule-making powers to monitor risk in the economy after the crisis led to US$460 billion of losses and writedowns across the continent, according to data compiled by Bloomberg.

The operating environment for banks is likely to remain challenging, in particular in respect of credit losses linked to their loan portfolios, according to the document, produced by the EU's Economic and Financial Committee. The draft document, partially entitled the effectiveness of financial support measures, will be debated at the next meeting of EU leaders on June 18-19 in Brussels.

EU governments approved about 311.4 billion euros for capital injections, 2.92 trillion euros for bank liability guarantees, 33 billion euros for relief of impaired assets and 505.6 billion euros for liquidity and bank funding support, a total of 3.77 trillion euros, the document shows.

The U.S. government and the Federal Reserve had spent, lent or committed US$12.8 trillion, an amount that approaches the value of everything produced in the country last year, as of March 31.

A majority of new member states including Slovakia, the Czech Republic, Estonia and Lithuania have not taken public measures to support their financial markets, the draft said. Many banks in the region are foreign-owned. More than 80 percent of bank loans in central and eastern Europe come from lenders owned by six western European EU countries, according to Moody's Investors Service.

All together, the EU paper said that 18 member states have introduced bank liability guarantees, 15 have approved recapitalization measures, and 11 have given liquidity support.

The programs have contributed to a stabilization of the extremely tense financial market conditions that were witnessed in the autumn of last year, according to the document. Still, there remain elevated risk premiums in many parts of the financial markets and this is likely to remain challenging.

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