PARIS - ALLOWING Lehman Brothers to fail last month was a major mistake for the equilibrium of the global financial system, French Economy Minister Christine Lagarde said on Wednesday, adding that France would not abandon its lenders.
Seeking again to reassure the public as the financial crisis deepened and European stock markets braced themselves for fresh falls, Mr Lagarde told French radio the government would back financial institutions threatened with bankruptcy.
Mr Lagarde described as 'horrendous' a decision by US Treasury Secretary Henry Paulson to allow Lehman Brothers to file for Chapter 11 bankruptcy protection on September 15 rather than try to rescue it.
'For the equilibrium of the world financial system, this was a genuine error,' she told RTL radio.
Mr Paulson's move, she said, had led to widespread distrust among banks, which have been reluctant to lend to each other amid fears of shattered balance sheets arising from the credit crisis.
While Lehman certainly had management problems and took wrong decisions, supporting it would have sent a more important signal simply because all lenders work together and act as counterparties for each other, she said.
'When we let one go, the risk is that others at that moment don't know who their counterparty is anymore and find themselves exposed. Once we let one domino fall, the rest risk collapsing.'
In a bid to boost confidence, on Tuesday EU finance ministers agreed to up the minimum level of insurance on bank deposits across the 27-nation bloc and pledged to recapitalise any vital bank to avoid, as France put it, another Lehman.
It was vital that governments restored the principle among financial market participants that no institution with systemic importance would be allowed to fail, Mr Lagarde said on Wednesday.
The crisis engulfing financial markets was deep and generalised, she said.
'To halt this situation, it is absolutely necessary to restore confidence,' she said.
It was also paramount to ensure that small and medium enterprises could secure access to financing, she said.
On moves unveiled by Britain on Wednesday to shore up its financial system by pledging to make at least 200 billion pounds (S$514 billion) available to lenders under a special liquidity scheme, Mr Lagarde said: 'The measure is very strong and it is certainly in line with the needs of British banks.'