Sydney, Sep 30, 2008 (ABN Newswire) - The credit crunch and the sharp loss of confidence since the failure of Lehman Brothers a fortnight ago claimed four victims in the European finance sector over the weekend and another major US bank.

In the latest of a stunning series of rescues, the Belgium Government and the regional administrations in that country, are reported to have agreed to rescue the Dexia bank, a Franco-Belgian financial group. Dexia has a big funds management business in Australia.

There's no sign of a cost figure as yet, but local media said it could be as high as 7 billion euros, or close to $A12 billion. 

It came 24 hours after the Belgium Government was involved in the rescue of Fortis, which also has operations here. That will cost 11 billion Eurosa for the Belgian, Dutch and Luxembourg governments.

Fortis, the Dutch-Belgium giant was bailed out, Hypo Real Estate, a big German property lender was also rescued by emergency funds from competitors and Bradford and Bingley in the UK was nationalised after parts were sold off.


The Icelandic Government took over Glitnir, the country's third largest bank which had expanded via short term borrowings, setting off the biggest fall in the country's stockmarket in its history and forcing an associated investment company in Britain into administration. That was the bankl's biggest shareholder and its failure threatens other companies in which it had shareholders. 

And as the debate in the US Congress unfolded, Wachovia, the country's sixth-largest lender, was rescued by Citigroup, with the US government take a $US12 billion stake in the country's largest bank.

The German government bailout of Hypo Real Estate will cost an incredible €35billion, or around $US55 billion. 

Central banks, led by the Fed revealed more liquidity swaps around midnight last night, our time. 

A total of $US330 billion in swaps was done with major central banks to boost the amount involved since Lehman Brothers failed to a massive $US630 billion.

The Fed also boosted its inter US domestic funding system called Term Auction Facilities to its banking system, increasing the amount to $US75 billion for each auction and revealing a total of $US350 billion in special auctions in November. 
Australia's RBA did a $US20 billion US dollar swap with the Fed in addition to the $US10 billion swap done last week. 

All the new swaps are timed to end next March as central banks seek to calm markets and provide enough liquidity to handle the end of the quarter (today) and then the end of the year.  


Fortis was the biggest shock, a mystery as the Financial Times put it this morning.

An apparently sound financial group with no real problems except one of confidence, plenty of assets and liquidity, but suddenly weak. .

And the worrying thing about the these near misses was the speed by which they emerged: it's clear the credit crunch post the Lehman failure is gathering pace around the world and moving offshore from the US where the attention has been.

The Fortis rescue saw a horrible word revealed: 'multinationalised' which means a company taken over by more than one national government.

Given the way the credit crisis is going, it could very well become a word we hear more of.

It popped up yesterday to describe the way that Fortis was rescued from probable collapse by a trio of European governments that joined together in a rare cross-border move to bail it out.

Belgium, the Netherlands and Luxembourg are pooling 11.2 billion euros ($US16.3 billion) to rescue Fortis, which late last week was feared to be on the brink of insolvency following large credit-related write-downs and heavy selling of the group's shares, even though short selling is banned in Belgium and Holland.

Each country's government will take equal-sized stakes in Fortis' banking operations in that particular country: Belgium will acquire a 49% stake in Fortis's Belgian banking units for 4.7 billion euros (or $US6.8 billion), and the Netherlands will buy a similar-sized stake in Fortis's Dutch banking operations for 4 billion euros ($US5.8 billion).

Smaller Luxembourg is extending a loan of 2.5 billion euros ($US3.6 billion) that can be converted into a 49% interest in Fortis' banking business in that tiny country.

And, under the terms of the bailout, Fortis will have to sell off the pieces of ABN Amro it acquired last year in a joint bid with RBS of the UK and Santander of Spain.

That triumvirate was the antithesis of the move by the three governments to save Fortis, which would have never found itself in this position, had it withdrawn from the ABN adventure when the credit crunch started.

Similarly, RBS has been forced to sell assets, raise new capital and cut costs because of a combination of subprime losses and the cost of funding its share of the ABN bid, which remains unfinished.

RBS has raised over $US30 billion and it now seems that a buyer for Fortis share of the ABN assets will have to be found.

RBS has no resources and Santander has just helped rescue the depositors in mortgage banker Bradford and Bingley after buying Alliance and Leicester a few months ago, also in the UK. It is also coping with a property crunch in its home market of Spain.

So Fortis might not be out of the woods yet, unless one of the governments wants to buy the ABN assets (highly unlikely).

Fortis is the largest European company so far to be dragged down by the credit crunch.

The bailout will hurt Fortis' largest shareholder, China's Ping An Insurance which owns a 5% stake. The Chinese group helped Fortis earlier in the year by buying 50% of Fortis funds management business.

Ping An will be diluted and it says that it will now end plans for that billion-dollar acquisition of a part of Fortis' asset management business. Ping An paid $US2.7 billion for 4.2% of Fortis in 2007 and upped its interest to 5% in March.

Ping An shares are down 18% since last Thursday when news of Fortis' problems erupted without much in the way of warning in Europe the night before. They were down 9% in Hong Kong yesterday.

Fortis posted a 49% second-quarter profit decline due to credit-related write-downs, which cut earnings by 918 million euros ($US1.3 billion) in the first half.

Fortis had suspended its half-year dividend and had planned to sell shares to recapitalise. But that wasn't enough.

In the UK, Santander is now busy sorting out what it now owns from the dismemberment of Bradford and Bingley, which was once the 8th largest mortgage bank in the UK.

Santander will take over the $A44 billion in deposits business and branch network of B & B.

It paid $US1.1 billion for the assets and 197 branches.

B&B's $A110 billion in mortgages and loans were nationalised.

Santander already owns Abbey, and recently bought Alliance & Leicester.

The mortgages and loans will be put with those from the nationalised Northern Rock. That will mean the US Government will own well over $A330 billion in unwanted mortgages and loans from the two failed former building societies.

The B&B assets are concentrated in the buy-to-let and so called low doc mortgages, which have rising arrears rates, much worse than even Northern Rock. It was a big funder of investor housing finance for homes and flats in recent years in Britain.

B&B's share price has plummeted.

A year ago its share price was around $A6.60 but had dropped to around 45c A. It's not known if the shares will have any value. Northern Rock shareholders who held on still have no idea if their shares will every have any value.

The bank will be nationalised using special legislation the Treasury put through when it took Northern Rock into public ownership earlier this year.

In Germany, Hypo Real Estate Holding, the country's second-biggest commercial-property lender, will scrap its 2008 dividend after securing a "multi-billion-euro'' credit line to rescue it from the turmoil on financial markets.

35 billion euros, a mind staggeringly large amount, is the size of the bailout, raising questions as to just how a German blue chip stock could get it so wrong.

The provision of the bailout loan by a group of German banks (organised by the Government) means Hypo Real Estate will have to slash the value of the goodwill of its stake in Depfa Bank, which is based in Ireland.

That will mean omitting the dividend.

Hypo's problems have been gathering pace but emerged over the weekend when the Financial Times German website reported that it was on the brink of collapse and needed some cash urgently.

"The new credit facility is a far-reaching and innovative approach which allows us to adjust our funding structure in order to accommodate the current malfunctioning of the international money markets,'' chief executive Georg Funke was quoted as saying in the statement. "Hypo Real Estate Group will not need to go back to the unsecured money market for its refunding in the foreseeable future.''

The company was reportedly borrowing short in wholesale markets to lend long through the Depfa bank for commercial property, amongst other things. The credit crunch cut off the source of funding

Hypo Real Estate didn't name the lenders or say how much money it received.

That figure came from Government sources and it was one of the biggest sums so far for an individual financial group. Around $A55 billion. Hypo has three fixed interest financial products listed on the ASX here (one a floating rate note and two with specified coupons).

The company had entered into talks with the banks "in response to the extremely challenging conditions on the international money markets following the Lehman Brothers collapse and other market disruptions.''

The German lender was spun off from HVB Group in 2003. It shocked with unexpected write-downs on collateralized debt obligations in January which saw the shares plunge 35%.

Hypo Real Estate said last month that second-quarter pretax profit plunged 95% because of further markdowns on debt-related investments.

Hypo Real Estate sought new investors earlier this year to shore up its balance sheet and a group led by J.C. Flowers & Co., the US buyout firm bought 24.9% of Hypo Real Estate in June for about 1.13 billion euros. (nearly $A1.9 billion). J.C. Flowers has lost $US1.5 billion in the rescue.


 

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About Australasian Investment Review

Australasian Investment Review (AIR) is a free daily news service with a weekly online magazine covering global financial markets with a focus on Australia, New Zealand and Asia.

Each morning (Sydney time) AIR's team of experienced journalists present you with a concise digest of expert opinions and analysis on trends and backgrounds that matter in these markets. AIR is available free of charge.

 



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