More European banks require help from their governments

By Jason Webb and Steve Slater | March 31, 2009, Tuesday |

Print Edition

SPAIN was forced into its first bank rescue since the financial crisis began and Germany and Britain also acted to shore up lenders as the sector braced for the full impact of rising bad loans.

Banks also stepped up efforts to sell assets following an improvement in market sentiment in recent weeks, as help from taxpayer-backed rescues is likely to be supplemented by more "self-help" from lenders able to beef up their balance sheets independently.

The Bank of Spain said it will take over the running of regional savings bank CCM and provide 9 billion euros (US$12.1 billion) in government guarantees to back the bank.

The Spanish government said it hoped the final aid bill would be a fraction of the guarantees pledged, and said CCM's problems were an isolated liquidity issue and the bank would meet all its obligations to creditors and depositors.

Germany's government has agreed to take an 8.7 percent stake in stricken Hypo Real Estate as a prelude to acquiring full control.

Britain, meanwhile, helped orchestrate the takeover of building society Dunfermline by Nationwide, Britain's biggest building society that has now rescued three smaller rivals during the financial crisis.

European bank shares fell in early trading yesterday as the state help stoked worries the crisis still has some way to run. The DJ Stoxx European bank index had rallied 39 percent over the past three weeks.

Switzerland's biggest bank UBS fell 7 percent amid expectations it could announce more writedowns and job cuts as early as this week. Sonntag newspaper said UBS would write down at least another US$2 billion on illiquid assets and cut a further 8,000 jobs.

Shares in Britain's Barclays sagged 8 percent after a report that it has opted not to take part in a potentially expensive government asset-insurance scheme.

Barclays is under less pressure to use the guarantee after the British regulator on Friday accepted its capital is adequate after "detailed stress tests" and it nears the sale of its iShares asset management unit, possibly for 4 billion pounds (US$5.7 billion).

Investors unsettled

Investors were still unsettled by the prospect it will not take any state guarantees, and trimmed last week's 65 percent surge, dealers said.

Bad loans have taken center stage as the last leg of the credit crisis and may last for some time, analysts at Goldman Sachs said.

The first three phases - the collapse of structured credit, a liquidity crisis and a decline in equity investments - were behind most of last year's profit warnings, but major warnings this year have been driven by deteriorating loans, it said.

"Since the start of the year, it has become apparent that the final part of the crisis - a severe credit quality cycle - has begun," Goldman's Jernej Omahen said in a note. "The length of the final stage is less certain, but we currently forecast it to last well into 2010."

Deteriorating loans are troubling Spanish banks as the country's economy worsens, but until now the government had been able to boast that its banking system has held up due to stricter regulations that prevented lenders investing in complex mortgage-backed securities.

But many banks are highly exposed to a property market that is rapidly collapsing, pushing up their non-performing loans and raising particular risks for unlisted savings banks with close links to regional governments, such as CCM.

The support for Germany's Hypo came after the bank said it lost 5.4 billion euros last year and needed state backing to meet regulatory capital requirements.

Finance

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More European banks require help from their governments

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