Monday, September 29, 2008

Europe Is Tanking

European governments stepped in to rescue Fortis, Bradford & Bingley Plc, and Hypo Real Estate Holding AG as tremors from the U.S. credit crisis reverberated around the world.

The U.K. Treasury seized Bradford & Bingley, Britain's biggest lender to landlords, while governments in Belgium, the Netherlands and Luxembourg threw an 11.2 billion-euro ($16.3 billion) lifeline to Fortis. Germany guaranteed a loan to Hypo.

The interventions exposed how fallout from the crisis that drove Lehman Brothers Holdings Inc. into bankruptcy and prompted a $700 billion U.S. bank-rescue package has gone global. It also added urgency to negotiations among European policy makers as to how they deal with banking collapses.

"The precarious global environment means the weakest links in Europe are now falling,'' said Mamoun Tazi, an analyst at MF Global Securities Ltd. in London. ``If banks continue not to lend to each other we'll see more failures.''

Shares of Dexia SA, a lender based in both Brussels and Paris, fell as much as 33 percent in Brussels trading after Le Figaro said the world's biggest lender to local governments may soon announce a plan to raise capital. Iceland agreed to buy 75 percent in Glitnir Bank hf, the island nation's third-largest bank by market value, for 600 million euros.

European equities and U.S. stock-index futures fell today. Euro-area economic confidence dropped this month to the lowest since the aftermath of the Sept. 11 attacks amid concern that the U.S. plan will fail to stem the crisis. The pound tumbled by the most against the dollar in 15 years and the euro slid.

ECB Auctions

The European Central Bank said today it will make additional funds available to banks through the end of the year in "special'' auctions to ease tensions in money markets. The cost of borrowing euros for three months soared to a record 5.24 percent today. The Libor-OIS spread, a gauge of cash availability among banks, widened to a record 219 basis points.

Tightening credit is casting a pall over the European economy with U.K. growth the weakest since the early 1990s and the 15-nation euro-area on the edge of its first recession. The risk is of a spiral in which the credit crisis and the economy begin to feed off each other, resulting in costlier borrowing and even weaker expansion.

"The extreme dislocations in European money markets are both a symptom and a source of serious stress in the financial sector, exacerbated by the rapidly deteriorating growth environment,'' said Marco Annunziata, chief economist at Unicredit MIB in London.
Fortis Rescue

To head off the collapse of its biggest bank, Belgium agreed to buy 49 percent of Fortis's Belgian banking unit for 4.7 billion euros, while the Netherlands will pay 4 billion euros for a similar stake in the Dutch business, the governments said in a statement late yesterday. Luxembourg will provide a 2.5 billion-euro loan convertible into 49 percent of Fortis's banking division in that country.

The talks to rescue Fortis involved European Central Bank President Jean-Claude Trichet. Former Bank of England policy maker Willem Buiter said today on his blog that the rescue of Fortis showed "the ability of the euro-area fiscal authorities to coordinate on a bailout for a bank with not only strong cross-boundary operations, but indeed with a strong multi- national identity.''

Santander Purchase

Bradford & Bingley was saved as tighter credit made it impossible for it to operate. Deposits at the bank amounted to slightly more than half of its loans outstanding, forcing it to depend on frozen capital markets for support. Banco Santander, Spain's biggest lender, will pay 612 million pounds ($1.1 billion), including a transfer of 208 million pounds of capital, to buy its branches and deposits.

Hypo Real Estate, Germany's second-biggest commercial- property lender, received a 35 billion euro loan guarantee to fend of insolvency. The rescuers of the bank will pay the guarantee cash in two allotments of 14 billion euros and 21 billion euros, a government official said, speaking on terms of anonymity.

Roskilde Bank A/S, the lender bailed out by the Danish central bank because of mortgage writedowns, said today it sold its branches to Nordea Bank AB, Spar Nord Bank A/S and Arbejdernes Landsbank A/S.

Bush Package

Acting in the aftermath of Lehman's collapse and government rescues of American International Group Inc. and mortgage lenders Fannie Mae and Freddie Mac, President George W. Bush and congressional leaders said yesterday that they reached agreement on a rescue package aimed at reviving moribund credit markets.

The U.S.'s woes have been transmitted abroad as investors focus on how much capital banks have on hand and as financial companies hoard cash for their own needs, shutting off funding for those whose access to money is limited.

Fortis dropped 35 percent last week in Brussels trading on concern the company would struggle to replenish capital depleted by the 24.2 billion-euro takeover of ABN Amro Holding NV units and credit writedowns.

"Markets thought that they were over-leveraged,'' Dutch central bank governor Nout Wellink said. "What's happening in the U.S. is having an impact on the rest of the world.''

The bailouts add to concern that Europe's patchwork of banking regulations will hinder coordinated response. While European Union officials are drafting legislation aimed at strengthening how large banks are monitored and what capital they must hold, governments have agreed only to knit supervisors closer together and pledged to cooperate in managing a crisis.

Rejecting Paulson Plan

Unwilling to commit taxpayer money up front, they have resisted calls to devise a plan for splitting the bill should a bailout become necessary. German Finance Minister Peer Steinbrueck and France's Christine Lagarde last week rejected a plea from U.S. Treasury Secretary Henry Paulson to follow the U.S. in erecting similar bailout mechanisms, arguing their banking systems aren't at risk of a systemic breakdown.

Still, of the $554.3 billion losses and writedowns recorded by banks since the start of 2007, 42 percent are accounted for by European institutions.

Daniel Gros, director of the Brussels-based Center for European Policy Studies, said in a report this month that the largest European banks have a leverage ratio -- which measures shareholders' equity to total assets -- of 35 compared with less than 20 for the biggest U.S. counterparts.

"Europe is under greater pressure to act now as it's still not ready for a major banking crisis and the worst fears of policy makers are coming true,'' said Nicolas Veron, an economist at Bruegel, a Brussels-based research organization.

Source - Bloomberg


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