Europe scrambles to fight financial fires
Markets reel as European financial institutions are pushed over the brink; central banks pump in massive amounts of funds to boost liquidity
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(WASHINGTON/BRUSSELS/FRANKFURT/LONDON) A swathe of bank rescue deals was mounted in Europe yesterday as several major financial institutions were tipped over the brink by the growing global credit crunch.
'Investors are fearful, frenetic, especially when it comes to banking shares. They want to get out now and see the after-effects from afar.'
- Frank Geilfuss,
head analyst at Bankhaus Loebbecke
Compounding the fears were anxiety over whether a tentative US$700 billion bailout of the US financial system will actually be sealed when lawmakers in Congress get down to a vote.
Even as investors took in the implications of events in Washington over the weekend, central banks in Asia and Europe pumped in huge amounts of liquidity into their financial systems yesterday to persuade fearful financiers to lend to each other.
The MSCI All-Country World Index of 48 nations lost as much as 4.4 per cent, the steepest plunge since the Asian financial crisis 11 years ago.
European shares dropped to a three-and- a-half year closing low yesterday, with banks weighing on the benchmark index amid persistent worries about the health of the financial industry on both sides of the Atlantic.
The FTSEurofirst 300 index of leading European shares ended unofficially down 4.95 per cent at 1,050.12 points - its lowest since January 2005. The benchmark index also notched up its biggest one-day percentage fall since Jan 21 this year.
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'Investors are fearful, frenetic, especially when it comes to banking shares. They want to get out now and see the after-effects from afar,' said Frank Geilfuss, head analyst at Bankhaus Loebbecke.
News of the takeover of the US Wachovia Corp's bank operations by Citigroup and the part nationalisation of two major European banks battered banking stocks, with Royal Bank of Scotland falling 16.8 per cent, Swiss bank UBS losing 13.6 per cent and UniCredit slipping 10.2 per cent.
'This credit crisis is pretty deep and it's pretty deep throughout the financial industry,' Jason Pride, who helps oversee about US$6.5 billion as director of research at Haverford Trust Co in Radnor, Pennsylvania, told Bloomberg Television.
In Europe, the governments of Belgium, the Netherlands and Luxembourg moved to part-nationalise Belgian-Dutch group Fortis with an injection of 11.2 billion euros (S$23 billion).
The banking and insurance company, which has 85,000 staff worldwide will sell the parts of Dutch bank ABN Amro it bought last year to Dutch rival ING in a deal expected to be finalised within two weeks.
British mortgage lender Bradford & Bingley was brought under the government's wing and Santander stepped in to buy its deposit book and branches, adding to its planned takeover of Alliance & Leicester.
German lender Hypo Real Estate, whose shares plunged more than 60 per cent in morning trade, secured a credit line from the German government and banks of up to 35 billion euros.
'The purpose of the whole operation is to allow an orderly winding down of Hypo Real Estate,' a German finance ministry spokesman said.
Shares in French bank Dexia tumbled 30 per cent on a report it might need emergency capital, and bank rescue deals emerged in Iceland, Russia and Denmark too.
'The nationalisations have an incredibly negative read across the sector,' said Mark Sartori, head of European sales trading at Fox-Pitt, Kelton. 'The contagion is spreading to mainland Europe and everyone's asking: who's next?'
As a whole, investors remained sceptical of the US efforts to stave off the crisis sparked last year by defaults on home loans.
'The contagion is spreading to mainland Europe and everyone's asking: Who's next?'
- Mark Sartori,
head of European sales trading at Fox-Pitt, Kelton
'A rescue plan worth US$700 billion is simply not enough to overcome the crisis for the foreseeable future. If anything, all the real economy problems will escalate as a result in the foreseeable future,' said Carsten Klude, strategist at MM Warburg.
Money markets remained frozen with banks refusing to lend to each other for all but the shortest periods.
Crude oil slumped almost US$7 a barrel, while copper, lead, corn, silver and rice all dropped, leading the S&P Goldman Sachs Commodity Index to a 5.2 per cent decline.
Energy and materials shares in the MSCI All-Country World Index retreated more than 6 per cent as a group.
The only gainer in the market was gold, which climbed 3 per cent as fresh worries over the health of the global financial sector sparked buying of safe-haven assets such as bullion.
In euro terms, gold was up nearly 5 per cent.
'Gold was weaker earlier on, but it has bounced back,' said Stephen Briggs, metals analyst at RBS Global Banking & Markets.
'For the moment, it is breaking away from its slavish attachment to the dollar. It doesn't look as though the financial problems are going to pass quickly, so this is gold's moment in the sun,' he said. -- Reuters, AFP, AP, Bloomberg
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