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 |  Subject: Europe Races to Shore Up Banks as Crisis Spreads  Sun Oct 05, 2008 10:39 pm | |
| Germany issued a blanket guarantee of all its consumer bank deposits on Sunday, as a group of European countries adopted emergency measures to shore up the Continent's financial system against the widening international credit crisis.
In tandem with its surprise move to protect deposits, the government of Germany, Europe's largest economy, arranged a bailout for Hypo Real Estate Holding AG, a giant property lender that came close to collapsing after private lenders pulled out of an earlier €35 billion ($48.2 billion) aid plan last week.
Also Sunday, the governments of Belgium and Luxembourg arranged a deal under which French lender BNP Paribas SA will take over the Belgian and Luxembourg operations of Fortis NV for roughly €15 billion in cash and stock. The deal for the Dutch-Belgian-Luxembourg insurance-and-banking giant came after a previous rescue plan last week failed to prevent an exodus of customers, and the Netherlands nationalized the Dutch wing of the company.
In Italy, meanwhile, the board of banking giant UniCredit announced that it would launch a €3 billion emergency capital increase. Sunday's meeting was a surprise; just days earlier, UniCredit's chief executive had gone on national television to say that the bank was solid.
But executives decided to call the meeting after the bank's stock was pummeled last week, as investors fretted about the credibility of the bank's reassurances and persistent worries over its cash levels. At one point UniCredit's stock reached a 10-year low before rebounding.
The patchwork of measures all came less than 24 hours after the leaders of Europe's four largest countries pledged after a meeting in Paris to protect their financial system. "We are taking a solemn commitment to back banking and financial institutions," French President Nicolas Sarkozy said at a news conference after Saturday's summit.
In the U.S., fed officials have taken aggressive actions in recent weeks to try to alleviate the severe pressures weighing on damaged short-term funding markets. New measures from the central bank are likely in the days ahead. It is not yet clear exactly what steps the Fed will take, but it could be aimed at commercial-paper markets, which have been damaged by skittishness among money-market funds, a big investor in this asset class.
The crisis in Europe now has broadened from the implosion of U.S. mortgage-related assets to a mounting unwillingness among European banks to lend to one another and a growing loss of confidence among investors and in some cases depositors. Adding to the predicament, governments from Ireland to Germany are trying to reassure their increasingly anxious voters. Denmark and Austria were also preparing extra protection for consumer deposits in the wake of the German move.
Other European banks could face similar funding strains to those of Fortis and Hypo, requiring public or private financial aid, as investors avoid making the kind of short-term loans that banks depend on for funding. In a sign that banks' borrowing costs are rising, the euro London interbank offered rate, or Libor, a measure of the rates at which banks lend to one another, hit 5.33% Friday, compared with 4.95% on Sept. 1.
Sunday's frantic and disparate moves raise questions about whether European governments, regulators and bankers have a comprehensive approach to addressing the deepening financial crisis. Some of Europe's largest economies are already flirting with recession.
"It's been a shocking reality check for everyone, and the specter of a vicious downward spiral of financial conditions and economic growth has now taken a very definite and concrete shape in everyone's mind," UniCredit global chief economist Marco Annunziata told clients in a note. Mr. Annunziata's note wasn't directly referring to UniCredit's situation.
German Chancellor Angela Merkel insisted that the banking system as a whole remained healthy and that problems were confined to individual cases such as Hypo. "We won't allow the distress of one financial institution to become the distress of the whole system," she said.
Potential ECB Role
Though European governments have tried to seem united in their quest for solutions to the credit crunch, divisions are rife. Last week, Ireland was criticized by several European Union governments when it decided to unilaterally guarantee all deposits held in the country's six largest financial institutions. The British Bankers Association called Ireland's moves anticompetitive, and the Central Bank and Financial Services Authority of Ireland said it has seen an increase in deposit inflows since the measures were passed last week.
Yet, so far, proposals for unified rules for coping with the crisis -- such as a multibillion-euro banking bailout fund like the U.S.'s $700 billion plan -- have been abandoned for fear they would be impossible to govern.
To fight the lack of bank funding, banks at some point could ask the European Central Bank to take on a role as clearing bank. The ECB would then operate as a middleman, matching deposit-rich institutions with banks that need to borrow. The ECB, along with other central banks around the world, has been injecting funds into the financial system, but banks have remained unwilling to lend to each other beyond periods of a few days.
As a result, the leaders of France, Germany, the U.K. and Italy didn't discuss concrete actions at Saturday's meeting, but instead agreed on a set of principles. Among them: keeping each other informed of measures to bail out banks, including slapping sanctions on the chiefs of failed banks.
They also said they would consider ways to amend international accounting standards and lobby for a softening of European rules that ban state aid and monopolies, according to a statement released after the summit. The leaders also said EU budget rules regarding the deficit and debt limits allowed for members of the euro common currency could be loosened.
As the crisis spreads, some observers are also beginning to ask whether European regulators have been tough enough in assessing both banks' exposure to souring assets and weaknesses in banks' ability to avoid liquidity shortfalls. Investor confidence in the ability of bank chiefs to correctly predict troubles is also waning.
Questions about UniCredit's need to raise capital, for example, first surfaced earlier this spring and then again last week, when the bank repeatedly denied them. And German officials were angered to discover during the weekend that Hypo had greater financial needs than they were told a week ago.
Ms. Merkel said Sunday that bankers at Hypo who had made irresponsible decisions would face consequences. The latest Hypo rescue package was a second emergency loan of €15 billion by German banks and insurers, on top of the €35 billion loan facility for the bank that was agreed a week ago by German lenders and the government.
Public Confidence
The deposit guarantee is aimed purely at shoring up public confidence rather than Hypo, which isn't a retail bank. Ms. Merkel's spokesman Ulrich Wilhelm said the unlimited consumer-deposit guarantee meant the government would step in if Germany's existing deposit-insurance plans couldn't fully compensate savers.
German banks already guarantee 90% of customer deposits up to €20,000, and a voluntary fund protects sums above that. But Lehman Brothers Holdings Inc.'s failure means those funds are already largely depleted, German officials say. German banks had to cover deposits at Lehman's German operations.
Hypo was on the verge of collapse because its Ireland-based unit Depfa Bank PLC can't refinance its debts. Its original package fell apart after banks participating in its bailout saw an analysis by Deutsche Bank AG that found that Hypo needed far more money than previously thought, according to people familiar with the analysis. Deutsche Bank said Hypo needed €50 billion in funds this year and possibly further tens of billions next year, these people said. A Deutsche Bank spokesman declined comment.
Hypo spokesman Hans Obermeier said the bank's estimate last week -- that it needed €15 billion in the short term and another €20 billion until next year -- was correct at the time.
But, he said, "suggestions that Hypo Real Estate needed to be wound down caused additional uncertainty in already jittery markets, making it even more difficult for Depfa to get liquidity."
Rescuing Fortis
BNP late Sunday agreed to a rescue deal for Fortis, the Dutch-Belgian bank that just a year ago took part in the biggest bank deal yet, the $101 billion acquisition of ABN Amro Holding NV. Fortis has operations in more than 50 countries and about 85,000 employees. It thought ABN would transform it from a midtier institution into one of Europe's largest private banking operations. Instead, the acquisition strained its finances, leading to its current need for a bailout.
As part of a complicated deal, Belgium, which had agreed to buy 49% of Fortis's banking unit in the country as part of the earlier bailout plan, said it also will buy the rest. It will then sell 75% of that unit to BNP for €8.25 billion of new BNP shares. The French bank will also buy Fortis's Belgian insurance operations. A portfolio of €10.4 billion of Fortis's structured products will also be created. Minority stakes in that will be held by Belgium and BNP. Fortis will continue to hold 66% of that portfolio and Fortis's international insurance operations.
This is the second weekend in a row that the governments have discussed rescuing Fortis, which ran into trouble earlier this year after the ABN acquisition stretched its finances just as the credit crisis hit. It marks a return for BNP which, along with other potential buyer ING Groep NV, walked away last weekend from a potential deal for Fortis, prompting government intervention. Late Friday, the Netherlands stepped in again to nationalize Fortis's operations in the Netherlands.
Majority Stake
Under terms being discussed, BNP would take a majority stake in what is left of Fortis, a person familiar with the matter said. Belgium and Luxembourg, which had agreed to buy 49% of Fortis's banking units in the two countries, would convert those stakes into minority stakes in the new, scaled-back Fortis. The two governments might also agree to protect BNP against losses in Fortis's structured-credit portfolio, this person said. BNP declined to comment.
French banking regulators, who had been reluctant to bless a BNP-Fortis union, have now indicated they won't stand in the way, according to a person familiar with the matter.
After its emergency meeting, UniCredit said it was cutting its 2008 earnings per share target to 39 European cents, before the €3 billion capital increase, from the previous 52 cents. The bank said the total amount of its capital strengthening measures was €6.6 billion. Also included is the placement of a €3 billion core Tier 1 convertible bond that has mostly already been sold to a group of institutional investors and some core shareholders of the bank.
The overall aim is to strengthen the bank's capital ratios to 6.7% at the end of 2008 from previous 6.2% under so-called Basel II international capital requirements.
"Finally, management addressed the key problem which is capital," said Marcello Zanardo, a banking analyst with Keefe, Bruyette & Woods Ltd. "This should have been addressed earlier, and it comes also came at the expense of management credibility."
http://online.wsj.com/article/SB122322574130505585.html |
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