France is working on a 300 billion ($417 billion) bailout fund to rescue European banks caught up in the credit crunch, according to press reports.
The cash could be used either to help recapitalize banks or to create a U.S.-style deposit for illiquid mortgage securities.
France holds the presidency of the European Union. Under the proposal, it would be looking to create a Europe-wide emergency fund that would be used to support banks when national governments failed to intervene.
However, according to press reports, the propoasl has been met with skepticism particularly from the German Chancellor Angela Merkel. Ulrich Wilhelm, a spokesman for Merkel, said that there was no need for "a measure along the lines of what has been decided in the US".
The British government also shared the view and stated that they are sticking to the Special Liquidity Scheme (SLS) system. The Bank of England is thought to be moving toward a plan to widen criteria on collateral banks can use for loans from the government.
Under the terms of the scheme, only triple-A rated mortgages written before December 2007 and packaged into securities can be used as collateral, although banks have petitioned for the inclusion of other assets such as corporate loans to be included.
Ireland on Tuesday unveiled plans to guarantee all retail deposits and substantially all wholesale funding obligations of six of the top Irish banks. The guaranty comes into force with immediate effect, covering all retail, commercial and interbank deposits as well as the banks covered bonds, senior debt and dated subordinated debt (lower tier II only). The guaranty, which is subject to specific terms and conditions, extend to both existing and new debt facilities for a period of up to two years ending on September 28, 2010. Banks will be charged for this government guarantee.
The guaranty means that the Irish government will effectively backstop some 500 billion of bank liabilities, according to Deutsche Bank. Although Irish bank securitizations are excluded from government guarantee it still yields an important benefit for RMBS and CLO bondholders, in that seller-related risks whether ratings or outright failure in the most extreme case have effectively been neutralized.
However, the improved cost of balance sheet debt funding could make future securitizations less appealing. Deutsche Bank said that if bailouts in other European jurisdictions replicate the Irish model, any recovery prospects for the primary European structured finance market would greatly diminish.