Crisis reaches Europe as institutions in four countries teeter

FRANKFURT — The turmoil that has rocked the U.S. banking system spread to Europe on Monday, buffeting institutions in at least four countries with a chain of new failures. Another U.S. bank was also consumed in a fire sale just when hopes were high that the worst was over.

Ny Tid
Published date: 30/09/2008

A day after squabbling U.S. politicians seemed to have a deal on the details of a $700 billion financial rescue package, Asian investors sent stocks tumbling amid potent reminders that the crisis still has unwritten chapters. Europeans followed suit as their week started with governments and central banks fighting fires from Germany to Iceland.
Crude oil prices also dropped sharply, on concerns the U.S. bailout would not be enough to revive the U.S. economy.
New economic data also hinted that a recession in Europe could be near, intensifying the sell-off and sending the euro lower against the dollar.

The U.S. Federal Reserve and the European Central Bank weighed in later in the day, intensifying their efforts to loosen up drum-tight credit markets that could eventually put a brake on the overall economies. The Fed more than doubled its pool of cash to inject into the financial system — known as currency swap lines — to $620 billion.
Yet official efforts to stem the crisis had little of the desired confidence-boosting effect on markets, despite an apparent effort to demonstrate that governments are putting a floor underneath them.
“It looks as though they are trying to make particularly significant statements by making the numbers as high as possible,” said Simon Adamson, a banking analyst with CreditSights in London. “But it may be that the market is becoming inured to these kinds of numbers.”
Instead, the day resembled a frenzied search for the next victim.
Belgium, the Netherlands and Luxembourg coughed up 11.2 billion euros, or $16.2 billion, to rescue the retail bank Fortis. The British Treasury said it had seized the lender Bradford & Bingley, after no private buyer emerged. Germany and its banks promised 30 billion euros to save Hypo Real Estate, a commercial property lender.

Wachovia, an American retail and mortgage lender, sought safety in a sale to Citigroup, but markets then turned on National City Bank, a regional lender based in Cleveland. In Europe, investors pounded the shares of Commerzbank, a German bank with operations that resemble those of Hypo Real Estate, while Royal Bank of Scotland suffered because it was part of a banking consortium with Fortis that bought ABN AMRO last year. Dexia, a French-Belgian bank that lends heavily to municipalities, plunged on rumors of an impending capital increase.
The race to find affordable credit also sank Glitnir Bank of Iceland, which sold a 75 percent stake to its government. The bank said that the past two weeks — since the bankruptcy of Lehman Brothers — had raised the cost of short-term funding to unbearable levels.

The latest turn of events also dealt a blow to bank executives and politicians who had ventured the occasional comment in recent months that the worst was over for Europe. Peer Steinbruck, the German finance minister, crowed last week about the end of U.S. dominance in finance, and the validation of Germany’s more conservative banking system.
That may still be true, but European officials left little doubt Monday that they were unnerved as credit markets pummeled institutions that betrayed even a whiff of weakness.
“I can only hope that confidence will come back,” said Jean-Claude Juncker, finance minister of Luxembourg, “and that this casino game that’s going on independently from the good fundamentals stops.”
The ECB, which has stepped in repeatedly to ensure adequate overnight cash for banks, went even further Monday. It granted banks in the 15-nation euro area a 150 billion euro loan for 30 days and promised more to head off the end-of-the-year cash squeeze that is normal in good times, and will probably be intense this year.
But systemic bailout along the lines of what the U.S. Treasury secretary, Henry Paulson Jr., proposed to Congress still seems unlikely in Continental Europe, analysts said. The rush toward the U.S. plan was underpinned by a housing market that shows few signs of recovery, a fact that gives experts confidence that case-by-case rescues can do the job in Europe.
“It’s completely unnecessary to do a Paulson-style plan in Europe,” said Sylvester Eijffinger, a professor of European financial economics at Tilburg University in the Netherlands. “These are isolated problems.”

The exception may turn out to be Britain, analysts said, where a housing crisis similar to the one in the United States is feeding the banking crisis.
Bradford & Bingley lost it all because it gave mortgages to landlords who used rental income to repay the loans. But a British economy that is poised for a painful recession on the back of a near-dead real estate market proved a merciless environment for the six-year-old lender.
The main source of nervousness in financial markets is still the United States.
But since some European banks were no strangers to the global borrowing binge, they are finding no relief from the jarring and persistent tightening of credit.
On Monday, executives pinned the demise of Fortis squarely on its involvement in a bid for ABN AMRO. Fortis paid 24 billion euros as part of the consortium that took over ABN AMRO, and will now sell its part of that bank, a Dutch retail business, to recapitalize itself.
Filip Dierckx, who recently became chief executive at Fortis, pinned cruel turn of events Monday squarely on the borrowing Fortis did to be part of that record-breaking deal.
“If you look at some of the decisions that were taken in the past, then you can say that probably they were done at the wrong moment,” Dierckx said. “If you want me to say that some of the decisions were not the best, I will indeed confirm that.”
But growing doubts about Europe’s macroeconomic direction amplified a rising sense of unease on a Continent accustomed to regarding the financial crisis as a primarily U.S. problem.
A survey published by the European Commission showed business and consumer confidence in September — even before the latest financial turmoil — dipped almost to the level it registered after the Sept. 11, 2001, terrorist attacks.
Many economists now expect the economy of the 15-nation euro area to contract in the third quarter, the second three-month period in a row, which is a common definition of recession.
That would also be a setback for the optimists, the ECB among them, who forecast the economy would bounce back strongly and shrug off rising credit market turmoil.
“The problem now is that the recovery looks like it’s going to be very slow,” said Aurelio Maccario, chief euro zone economist at UniCredit in Milan. “The financial crisis is taking a huge toll on that process in Europe.”
The ECB is expected to leave its key interest rate on hold at 4.25 percent when it meets Thursday, and most analysts are still leery about predicting a quick cut in borrowing costs. The bank is still focused strongly on inflation, which is running near double its target of 2 percent.