Governments across Europe rescuing troubled banks
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LONDON -- European governments yesterday announced a flurry of bank bailouts from Germany to Iceland, but the rescue deals only heightened fears that the contagion from the U.S. 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 that a planned U.S. government $700 billion bailout package would not be enough to stem the crisis. A few hours later, the U.S. House defeated the rescue package by a vote of 228-205.
"In the near term, it will be the weak ones that will be picked off," Global Insight chief European economist Howard Archer said before the congressional vote 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."
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 yesterday.
Germany organized a credit lifeline for blue-chip commercial real estate lender Hypo Real Estate Holding AG, while Iceland took over Glitnir bank, the country's third largest.
Additionally, the European Central Bank joined with the U.S. Federal Reserve in doubling the credit swap line that makes dollars available to cash-hungry banks, from $120 billion to $240 billion. The Bank of England doubled dollar availability, to $80 billion, while other central banks offered smaller amounts.
Renate Brand, a banking analyst at SNS Securities, said, "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 markets had become so jittery that rumor 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."
Notably, the Fortis bailout happened 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 euro ($16.4 billion) bailout package.
First Published September 30, 2008 2:32 am