European governments stump up €35bn in a day to prop up ailing banks
Five European governments today shelled out nearly €35bn ($51bn) to prop up three financial institutions as the global financial crisis deepened in the region, but the move failed to quell panic in the equity and credit markets as the threat of more widespread casualties deepened.
In the UK, roughly £18bn (€22.7bn) was paid out to push through a deal to transfer retail deposit accounts held at stricken lender Bradford & Bingley to Spanish-owned rival Abbey. Roughly £14bn of the sum was paid by the Financial Services Compensation Scheme, with the balance paid by the UK Treasury to transfer retail deposits not covered by the scheme.
While Abbey will take over B&B’s UK and Isle of Man retail deposits business and its branch network, he remainder of B&B’s business will follow rival Northern Rock into public ownership, the Treasury confirmed today. It is believed the deal could be investigated as it could violate European Union rules restricting state subsidies to business.
Fortis secured “concerted action” from the Belgian, Dutch and Luxembourg governments to strengthen its finances and ease investor and customer fears this morning, as the trio of governments paid a combined €11.2bn in return for 49% stakes in the Fortis operations in each of their countries, according to a statement released this morning.
Fortis will also sell the ABN Amro business it acquired last year, apart from asset management, at below the €24bn purchase price. A sale for less than €12bn would hit its core equity, the bank warned.
The deepening financial crisis also impacted Iceland, where the government today reached a deal to take control of Glitnir Bank after urgent discussions over the weekend in the wake of deteriorating market conditions in the past fortnight. Iceland’s government will take a 75% stake in Glitnir through the issuance of fresh equity for €600m.
The sale of the Glitnir stake comes just a week after rival Kaupthing welcomed its first big foreign shareholder as a Qatari sovereign wealth unit took a 5% stake in the bank.
European credit and equity markets were hit hard this morning by the B&B and Fortis news.
The FTSE 100 dropped below 5,000 for the third time this year and was trading at 4948.86 at 10.16 GMT having lost 2.7% of its value. The French CAC 40 index had fallen by 3% at the same point, while the German Dax 30 index was 2.7% down.
Although the US Congress has reached agreement on a $700bn bailout of the US financial industry, there was no bounce for European banking stocks. The FTSE Eurofirst 300 Banks index fell 5% to 716.7 at 10.09 GMT. The OMX Iceland 15 Index, which is made up of seven financial stocks, fell by 3.4% to 4132 at 10.30 GMT.
The Markit iTraxx Europe index, which tracks the cost of credit default swaps on the debt of 125 investment grade rated companies, was 9 basis points wider at 125 basis points this morning versus Friday’s closing price, according to Markit, as investors started to absorb the news of the bank nationalisations, marking the latest victims of the turmoil.
The rise means it costs $125,000 a year for five years to insure $10m of outstanding corporate or financial institution debt. CDS’ are derivative instruments that offer a type of insurance against the risk of default, or the non-repayment of debt. The rise in the cost of the protection tends to indicate that the market believes there is a higher risk of default.
Mehernosh Engineer, a credit strategist at BNP Paribas in London, said: “We’re going to get more bank problems cropping up. There are still quite a few entities out there which are weaker.” German lender Hypo Real Estate, which is heavily exposed to the commercial real estate, struck a last minute deal today to refinance debt with banks.
Shares in Belgian bank Dexia, which specialises in lending to local governments, lost a third of its value in early trading today reaching a low of €6.62 after the Fortis deal was announced.
A report that Dexia is planning to announce a capital raising to restore market confidence, published by French newspaper Le Figaro today, was another factor that may have contributed to the sell-off.
Although Dexia has a strong capital base with a tier one ratio of 11.4% at the end of June, Dexia said earlier this month that it expects losses from Lehman Brothers exposures to amount to around €350m, largely from investments in Lehman bonds and from the value of derivative contracts. The company’s stock has lost 55% of its value so far this year. Dexia was not immediately available for comment.
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