European banks need bail outs too

September 29, 2008 8:10:58 AM PDT
European governments had to step in with a flurry of major bank bailouts from Iceland to Germany as fear and turmoil from the U.S. credit crisis spread through the financial system.

Even as U.S. lawmakers were preparing to vote on a massive $700 billion (euro490 billion) 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 organized 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.

The rapid-fire European bailouts were quickly followed by news that U.S. financial giant Citigroup Inc. was acquring the banking operations of troubled Wachovia Corp., the latest U.S. financial institution to fail or be sold. Citigroup will absorb losses of up to $42 billion in a government-facilitated takeover.

European shares fell heavily and money markets remained frozen with banks refusing to lend to each other for all but the shortest periods.

"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. "Despite the rescue packages in the U.S. (and Europe) that doesn't fully correct the problem. I see the problem flowing until late next year," he added.

Shares in Fortis, Belgium's largest retail bank, continued to fall Monday after Belgium, the Netherlands and Luxembourg agreed to an 11.2 billion euro ($16.4 billion) bailout package late Sunday to avert a run on the bank. The three governments took a 49 percent stake in exchange and demanded Fortis sell the stake it had bought in ABN Amro a year ago for euro24 billion euros - a move that many analysts believe started its troubles.

The bailout was meant to restore confidence in the bank before the reopening of markets on Monday after a tumultuous week of imploding share values at Fortis.

There was little likelihood of that, however, amid news of other European rescue packages and investor skepticism about the effectiveness of a tentative deal in Washington on plan to buy bank's bad assets and stabilize the financial system.

In Britain, the government nationalized its second bank this year, taking over Bradford & Bingley's 50 billion pound ($91 billion) mortgage and loan books and paid out 18 billion pounds ($33 billion) to facilitate the sale of its savings business, including its entire retail branch network, to Spain's Banco Santander.

"We will do whatever it takes to ensure the stability of the British financial system," British Prime Minister Gordon Brown told reporters.

"We will continue to do whatever is necessary over the next few days in very difficult times, in turbulent times throughout the world, to ensure that British financial stability is maintained."

Santander, the second largest bank in Europe, said it will pay 612 million pounds ($1.1 billion) for Bradford & Bingley's 197 branches and 20 billion pounds of deposits.

Britain earlier this year nationalized Northern Rock, but not until after the mortgage lender suffered a damaging run on its deposits by spooked customers and is keen to move quicker to avert any repeat of that situation.

The biggest U.S. 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. A decision to break up the total amount into smaller stages may have limited its effectiveness in reassuring markets, one analyst said.

"The fact the funds won't be released in one lot but instead a series of tranches is certainly detracting from its appeal and this, combined with the very visible scars of the credit squeeze, will again weigh on sentiment," said Matt Buckland, a dealer at CMC Markets.

In Iceland, the government took control of Glitnir bank, the country's third largest, buying a 75 percent stake for 600 million euros ($878 million) 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 became the first German blue-chip company to seek a bailout in the global financial crisis, securing a line of credit of up to euro35 billion ($51.2 billion) aimed at shielding Germany's No. 2 commercial property lender as the meltdown expanded in Europe.

The government's Finance Ministry said it provided the hefty credit in a consortium with several other banks, though it did not identify them. It said that none of the banks were foreign.

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AP Business Writers George Frey in Frankfurt, Emily Flynn Vencat in London, Toby Sterling in Amsterdam and Matt Moore in Berlin contributed to this report.