Governments step in as finance woes spread in Europe

30th September 2008, Comments 0 comments

European governments move in to shore up liquidity-plagued institutions.

The fallout from the US financial sector crisis made itself felt in Europe on Monday, with governmental bail-outs announced for key banks in Britain, the Benelux and Germany as well as a state takeover of a bank in Iceland.

As the financial industry's problems appeared, virus-like, to be spreading deeper into Europe's banking, real estate and insurance sectors, French President Nicolas Sarkozy called a meeting of banking and insurance industry chiefs in his country to review the situation.

His move came on a day when news around Europe's financial markets was one of governments moving in to shore up liquidity-plagued institutions. Among the major developments:

-- In London, the British government intervened to save major mortgage lender Bradford & Bingley (B&B) by taking it into public ownership and selling off its savings and deposits business.

-- In Brussels, a deal was announced by the Netherlands, Belgium and Luxembourg to take over substantial parts of Belgian-Dutch banking and insurance company Fortis.

-- In Berlin, the German Finance Ministry announced that the government and top banks were moving to inject billions of euros into troubled mortgage lender Hypo Real Estate (HRE) but that there would be no nationalization of the company.

-- In Reykjavik, the Iceland government and Glitnir bank announced that the state was taking a 75-percent stake in Glitnir bank for 600 million euros. The move was aimed to boost Glitnir's capital ratio and liquidity.

The Bradford & Bingley bail-out did not come as a surprise to markets, as it had become increasingly apparent in recent days that a deal involving British state intervention was in the making.

"We will do whatever it takes to ensure the stability of the financial system in the wake of the nationalization of Bradford & Bingley bank," Prime Minister Gordon Brown said in a statement.

Brown said he had been working "night and day" over the weekend to secure an agreement on the bank's future.

He would continue to do so do make sure that Britain could come through the current "downturn."

"We have taken quick and decisive action to stabilize the banking system," Chancellor of the Exchequer Alistair Darling said.

While London was working on a deal for B&B, it emerged that it had been a busy weekend in Brussels, where the governments of the Netherlands, Belgium and Luxembourg hammered out a deal for each to purchase 49 percent of Fortis' businesses in their respective countries, supplying the bank a total of 11.2 billion euros.

The bail-out plan also entails the sale of Dutch banking division ABN Amro by Fortis, while Fortis chairman Maurice Lippens is to step down, a move which shareholders had been demanding of late.

The government intervention provides Fortis with the funding it has desperately needed since its joint takeover along with the Royal Bank of Scotland and Spain's Banco Santander of ABN Amro in October 2007. Fortis' share of the takeover was 24 billion euros.

Dutch Finance Minister Wouter Bos said Fortis remained a credible bank, but that it had become "very vulnerable."

"We could also not have intervened but the question was if Fortis would have survived Monday morning," he said. Governments were "obligated to keep a bank like Fortis going in difficult times like these."

Meanwhile in Berlin, the German Finance Ministry announced that the government and top banks would be injecting billions of euros Monday into a troubled mortgage lender, Hypo Real Estate (HRE), as it teetered on the brink of collapse.

The ministry said HRE would need a guarantee totaling 35 billion euros ($50 billion).

It was pointed out that while that commitment was needed in order for the banks to bail HRE out, the institute's actual losses were not that high. The ministry also stressed that no nationalization was intended at HRE.

Finance Ministry spokesman Torsten Albig described a two-state rescue plan requiring German commercial banks to sustain 60 per cent of the cost of the first stage, totaling 14 billion euros if HRE defaulted.

HRE is the first major German casualty of the current worldwide financial crisis. Germany's second-biggest commercial-property lender, a blue chip among the 30 top companies in the DAX stock index, had fallen victim to speculation by its Dublin-based unit Depfa, which specializes in loans to local governments in Germany.

In Reykjavik, Iceland's majority takeover of Glitnir bank was a comparatively small matter costing only 600 million euros.

However, as bank chief executive Larus Welding remarked, "having the government as an owner strengthens the capital base of the bank and removes all doubt about Glitnir's financial strength." He added: "We have seen similar things happen in the countries around us, which reflects the tough position that currently prevails in international financial markets."


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