Euro banks bailed out as crisis worsens

Source TheAge

European governments announced a flurry of bank bailouts from Germany to Iceland, but the rescue deals only heightened fears that the contagion from the US credit crisis has much further to spread before the financial system recovers.

European shares fell heavily and money markets remained frozen with banks refusing to lend to each other for all but the shortest periods amid concern a planned US government $US700 billion ($A845.67 billion) bailout package would not be enough to stem the crisis.

"In the near term, it will be the weak ones that will be picked off," said Global Insight chief European economist Howard Archer of the expectation that more banks would collapse or need rescue.

"But, obviously, the more the turmoil and dislocation continues, the further this could spread," he added. "We live in vicious times."

Even as US lawmakers were preparing to vote on the planned rescue of their own banks, the governments of Belgium, the Netherlands and Luxembourg took partial control late Sunday of struggling bank Fortis NV, while Britain seized control of mortgage lender Bradford & Bingley early Monday.

Germany organised a credit lifeline for blue-chip commercial real estate lender Hypo Real Estate Holding AG, while Iceland's government took over Glitnir bank, the country's third largest.

Additionally, the European Central Bank joined with the US Federal Reserve in doubling the credit swap line that makes dollars made available to cash-hungry banks from $US120 million ($A144.97 million) to $US240 million ($A289.94 million). The Bank of England doubled dollar availability to $US80 billion ($A96.65 billion), while other central banks offered smaller amounts.

Renate Brand, a banking analyst at SNS Securities, said that "it's getting difficult for a lot of banks at once now, because mistrust is so great and so widespread."

Ton Gietman from Petercam Securities said that markets had become so jittery that rumour and fact were being treated about the same.

"Take a company like Fortis, whose management swears high and low that they don't have any solvency problem - and it's still an open question whether they did or not - this market doesn't care," he said. "If you can't stop your share price from falling with anything you say, you have to take some action to reassure investors and depositors."

Analysts are closely watching Dexia, a French-Belgian specialist in lending to local governments that ran up huge losses in its US operations. The bank had no comment on a report it was planning a rapid capital increase but said the board would meet Monday night to assess the situation. Belgian Prime Minister Yves LeTerme also called a cabinet meeting Monday to discuss Dexia.

Notably, the Fortis bailout took place across national lines. For months, European officials have been concerned whether governments would work together in a crisis. In this case they did, with European Central Bank president Jean-Claude Trichet attending the negotiations in Brussels on the 11.2 billion euros ($A19.81 billion) bailout package.

The three governments took a 49 per cent stake in exchange and demanded Fortis sell the stake it had bought in ABN Amro a year ago for 24 billion euros ($A42.2 billion) - a move that many analysts believe started its troubles. However, some positive news was provided by the joint action taken by Belgium, the Netherlands and Luxembourg in agreeing

"The ability of the euro area fiscal authorities to co-ordinate on a bailout for a bank with not-only strong cross-boundary operations, but indeed with a strong multinational (almost supranational) identity was untested until today," Willem Buiter, a professor at the London School of Economics and a former Bank of England policymaker, said in his blog on www.ft.com.

"They passed the test."

The government took over Bradford & Bingley's 50 billion pound ($A109.94 billion) mortgage and loan books and paid out 18 billion pounds ($A39.87 billion) to facilitate the sale of its savings business, including its entire retail branch network, to Spain's Banco Santander.

Britain earlier this year nationalised Northern Rock, but not until after the mortgage lender suffered a damaging run on its deposits by spooked customers. The government's desire to move quickly to avert any repeat was underscored by its swift action on Bradford & Bingley - a systematically unimportant buy-to-let lender that is around half the size of Northern Rock at its peak.

In Iceland, the government took control of Glitnir bank, the country's third largest, buying a 75 per cent stake for 600 million euros ($A1.06 billion) in a move it said was to ensure broader market stability. Central Bank of Iceland chairman David Oddsson said that Glitnir, which has operations in 10 countries, would have collapsed if the authorities had not intervened.

In Germany, Hypo Real Estate Holding AG, the country's No.2 commercial property lender, became the first German blue chip company to seek a bailout in the global financial crisis, securing a line of credit of up to 35 billion euros ($A61.85 billion).

Despite the concerted attempt by European authorities to shore up confidence, stock markets tumbled in response to the series of measures - the London Stock Exchange FTSE 100 dropped 4.7 per cent, Germany's DAX fell 3.7 per cent and France's CAC 40 shed 4.6 per cent.

"All banks are having difficulty with long term loans and short term financing. It's difficult to say which could be affected," said UniCredit economist Alexander Koch in Munich. "I see the problem flowing until late next year."

The biggest US bailout in history, which goes to the House for a vote Monday and to the Senate later in the week, would give the administration broad power to use taxpayers' money to purchase billions of home mortgage-related assets held by cash-starved financial firms. Analysts said a decision to break up the total amount into smaller stages may have limited its effectiveness in reassuring markets.