First you should know that there is a Memorandum of Understanding signed by the EU members, which explains how EU central banks, ministers of finance and financial regulators should cooperate with each other, especially in times of financial distress. It was published in June 2008, link is here. If you read the text then you will immediately see that what you see in practice is very far from what was agreed, including one extremely important aspect, i.e. external communication.

Let me recall three principles from the MoU

  1. The objective of crisis management is to protect the stability of the financial system in all countries involved and in the EU as a whole and to minimise potential harmful economic impacts at the lowest overall collective cost. The objective is not to prevent bank failures.
  2. In a crisis situation, primacy will always be given to private sector solutions which as far as possible will build on the financial situation of a banking group as a whole. The management of an ailing institution will be held accountable, shareholders will not be bailed out and creditors and uninsured depositors should expect to face losses.
  3. The use of public money to resolve a crisis can never be taken for granted and will only be considered to remedy a serious disturbance in the economy and when overall social benefits are assessed to exceed the cost of recapitalisation at public expense. The circumstances and the timing of a possible public intervention can not be set in advance. Strict and uniform conditions shall be applied to any use of public money.

Now think about these principles in the context of decisions taken in the last few weeks.

You should also know, that Fitch has already downgraded Iceland government debt in response to nationalization of the troubled bank, Moodys put Iceland on negative watch. It can happen to every country. NO EXCEPTIONS.

When four countries meet tomorrow (France, UK, Germany, Italy) they should think about credibility to deliver on promises, about private sector centered solutions (also involving non-EU countries) and about little Iceland as a warning sign.