Europe battles to contain crisis

We’re sorry, this feature is currently unavailable. We’re working to restore it. Please try again later.

Advertisement

This was published 15 years ago

Europe battles to contain crisis

European governments from Brussels to Copenhagen to Berlin rushed to shore up their faltering banks as the credit crunch worsened in Europe.

BNP Paribas SA agreed to buy Fortis's units in Belgium and Luxembourg for 14.5 billion euros ($27 billion) after a government rescue failed, while the German state and financial institutions put together a 50 billion-euro rescue package for Hypo Real Estate Holding AG. Denmark and Germany said they will guarantee all their countries' bank deposits.

Financial shares tumbled in European trading on concern the hurried actions will fail to unlock bank lending. European Union leaders today issued a statement today pledging to ``take whatever measures are necessary'' to protect banks and deposits. The leaders of the four biggest EU economies were unable to agree on joint responses at a meeting two days ago, pledging instead to work together to limit the economic fallout, ease accounting rules, and seek tougher financial regulations.

The governments' plan for individual action ``is a failure,'' said Pio De Gregorio, head of equity research and trading at Centrobanca SpA in Milan. ``This is a systemic crisis and it warrants a systemic solution. We need a European fund that will recapitalize banks.''

The escalation in the cost of rescuing Hypo Real Estate and Fortis, just a week after the initial bailouts were announced, also undermined confidence, analysts said.

Shares decline


The Bloomberg 500 Europe Banks and Financial Services Index dropped 7.1% in Paris. The euro slid to a 14- month low against the dollar and Treasuries rose as the crisis spread outside the US, prompting investors to opt for less risky investments.

The cost of borrowing in euros for three months rose to a record for a seventh day, according to the European Banking Federation. Commercial banks are hoarding cash and refusing to lend to each other after the collapse of New York-based Lehman Brothers Holdings Inc.

French President Nicolas Sarkozy, who convened the Oct. 4 meeting, called for a global summit ``as soon as possible'' to implement ``a real and complete reform of the international financial system.'' He said ``all actors'' must be supervised, including credit-rating firms and hedge funds. Executive-pay systems must also be reviewed, he said.

Finance ministers from the Group of Seven industrialized nations meet in Washington later this week.

Merkel's position


German Chancellor Angela Merkel's opposition to collective action underscored the hurdles to a united European front. ``Each country must take its responsibilities at a national level,'' she told a joint press conference after the summit.

Germany will guarantee the savings of private account holders, Merkel said, in a bid by Europe's biggest economy to prevent a rush of withdrawals. Until now, German savings accounts, including those of small, privately held companies, have been guaranteed by 180 banks in Germany, the BDB private banks group said on Oct. 2. The guarantees of the banks covered 90% of an account's balance to a maximum of 20,000 euros, the group said.

Denmark said today commercial lenders will provide as much as 35 billion kroner ($8.9 billion) over the next two years to a fund to insure depositors against losses. Sweden will double the guarantee on bank deposits to 500,000 kronor ($97,000), whileUK Chancellor of the Exchequer Alistair Darling said Britain is ``ready to do whatever it takes'' to help its banks.

The commitments follow similar verbal pledges by Sarkozy and Italian Prime Minister Silvio Berlusconi, both of whom have promised to prevent losses for depositors in their countries. Ireland is guaranteeing banks' deposits and debts for two years.

BNP buys Fortis


Amid the race to shore up Europe's faltering financial institutions, BNP Paribas, France's biggest lender, agreed to take control of Fortis's units in Belgium and Luxembourg.

The sale comes after a Sept. 28 bailout failed to stabilize what was Belgium's biggest financial-services firm, as clients withdrew money and the company had trouble obtaining loans. Fortis received an 11.2 billion euro capital injection from Belgium, the Netherlands and Luxembourg.

The Belgian government will have an 11.6% stake in BNP Paribas, and Luxembourg a 1.1% holding, after the purchases are completed, BNP Paribas said in a statement today.

On Oct. 3, the Dutch government took control of Fortis's units in the Netherlands for 16.8 billion euros after deciding the initial rescue didn't go far enough.

Hypo Real Estate won a reprieve after Germany's finance ministry said the country's banks and insurers agreed to double a credit line for the company to 30 billion euros. The federal government's guarantee for the credit line remains unchanged, Torsten Albig, a spokesman for Finance Minister Peer Steinbrueck, said late yesterday in an e-mailed statement.

Too big to fail


Munich-based Hypo Real Estate had earlier announced that a government-backed 35 billion-euro bailout plan collapsed after commercial banks withdrew their support. The government and the Bundesbank have said that the nation's second-biggest property lender is too big to fail. The stock fell as much as 54%, and was down 36% at 4.80 euros in Frankfurt trading.

Dexia SA, the world's biggest lender to local governments, got a 6.4 billion-euro state-backed rescue on Sept. 30. Belgium's federal and regional governments, France and the company's largest shareholders will supply the funds, The Brussels- and
Paris-based company said yesterday it won't need additional funding to cope with the deterioration in financial markets. The stock dropped 18% in Brussels trading.

UniCredit SpA, Italy's biggest bank by assets, said it planned to boost capital by as much as 6.6 billion euros in an effort to calm investors' concerns about the strength of the lender's finances.

Helping banks


The capital-raising project approved late yesterday by the bank's directors includes replacing the lender's cash dividend for 2008 earnings with 3.6 billion euros of new shares, and selling 3 billion euros of convertible securities. The shares fell as much as 16% in Milan trading, and were 9% lower at 2.81 euros

In theUK, Darling said the government, which took over Bradford & Bingley Plc last week, is ready to offer further support to banks that may get into financial difficulty. He did not rule out a further injection of capital for failing institutions.

``We are ready to do whatever it takes, and that is, we've put money in to help banks generally,'' Darling told the British Broadcasting Corp.'s Sunday AM program. ``There are other measures we will be taking too, and I will announce them when we are ready to do that.''

U.K. Prime Minister Gordon Brown was among the leaders gathered in Paris, along with Berlusconi, Luxembourg Prime Minister Jean-Claude Juncker, European Commission President Jose Manuel Barroso and European Central Bank President Jean-Claude Trichet.


Bloomberg News

Most Viewed in Business

Loading