European Crisis Deepens; Officials Vow to Save Banks , Update

By Sandrine Rastello
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Oct. 6 (Bloomberg) -- The credit crunch deepened in Europe as government leaders pledged to bail out troubled banks and protect depositors.

BNP Paribas SA will take control of Fortis's units in Belgium and Luxembourg after government efforts to ensure the company's stability failed, while Germany's government and financial institutions agreed on a 50 billion euro ($68 billion) rescue package for Hypo Real Estate Holding AG. U.K. Chancellor of the Exchequer Alistair Darling said Britain is ``ready to do whatever it takes'' to help its banks.

The developments yesterday came a day after a summit in Paris where leaders of Europe's four biggest economies stopped short of a plan mirroring the $700 billion rescue in the U.S. to counter the worst financial crisis since World War II. Instead, they agreed to work together to limit the economic fallout, ease accounting rules, and seek tougher financial regulations.

``Until now the solutions have appeared to be uncoordinated, so perhaps it's time for a more coordinated approach globally,'' said Torsten Slok, an economist at Deutsche Bank AG in New York. ``It's not just the U.S. and Europe, it's banks in every part of the world.''

The euro slid to a 13-month low against the dollar and Treasuries rose as the credit crisis spread outside the U.S., prompting investors to opt for less risky investments. Asian stocks fell for a third day, led by financial companies.

`New World'

French President Nicolas Sarkozy, who convened the Oct. 4 meeting, called for a global summit ``as soon as possible'' to implement ``a real and complete reform of the international financial system.'' He said ``all actors'' must be supervised, including credit-rating firms and hedge funds. Executive-pay systems must also be reviewed, he said.

``We want a new world to come out of this,'' Sarkozy said. ``We want to set up the basis for a capitalism of entrepreneurs, not speculators.''

Finance ministers from the Group of Seven industrialized nations meet in Washington later this week.

German Chancellor Angela Merkel's opposition to collective action underscored the hurdles to a European front. ``Each country must take its responsibilities at a national level,'' she told a joint press conference after the summit.

Germany will guarantee the savings of private account holders, Merkel said, in a bid by Europe's biggest economy to prevent a rush of withdrawals. Denmark said today commercial lenders will provide as much as 35 billion kroner ($6.4 billion) over the next two years to a fund to insure depositors against losses.

Deposit Guarantees

Until now, German savings accounts, including those of small, privately held companies, have been guaranteed by 180 banks in Germany, the BDB private banks group said on Oct. 2. The guarantees of the banks covered 90 percent of an account's balance to a maximum of 20,000 euros, the group said.

The German and Danish governments' commitments follow similar verbal pledges by Sarkozy and Italian Prime Minister Silvio Berlusconi, both of whom have promised to prevent losses for depositors in their countries. Ireland is guaranteeing banks' deposits and debts for two years, to restore confidence in the country's financial industry.

Amid the race to shore up Europe's faltering financial institutions, BNP Paribas, France's biggest lender, agreed to pay 14.5 billion euros for control of Fortis's units in Belgium and Luxembourg.

BNP Paribas

The sale comes after a Sept. 28 bailout failed to stabilize what was Belgium's biggest financial-services provider, as clients withdrew money and the company had trouble obtaining loans. Fortis received an 11.2 billion euro capital injection from Belgium, the Netherlands and Luxembourg.

The Belgian government will have an 11.6 percent stake in BNP Paribas, and Luxembourg a 1.1 percent holding, after the purchases are completed, BNP Paribas said in a statement today.

On Oct. 3, the Dutch government took control of Fortis's units in the Netherlands for 16.8 billion euros after deciding the initial rescue didn't go far enough.

Meanwhile, Hypo Real Estate won a reprieve after Germany's finance ministry said the country's banks and insurers agreed to double a credit line for the company to 30 billion euros. The federal government's guarantee for the credit line remains unchanged, Torsten Albig, a spokesman for Finance Minister Peer Steinbrueck, said late yesterday in an e-mailed statement.

Too Big to Fail

Munich-based Hypo Real Estate had earlier announced that a government-backed 35 billion-euro bailout plan collapsed after commercial banks withdrew their support. The government and the Bundesbank have said that the nation's second-biggest property lender is too big to fail.

The Hypo reprieve comes after Dexia SA, the world's biggest lender to local governments, got a 6.4 billion euro state-backed rescue on Sept. 30. Belgium's federal and regional governments, France and the company's largest shareholders will supply the funds for Brussels- and Paris-based Dexia.

Meanwhile, UniCredit SpA, Italy's biggest bank by assets, said it planned to boost capital by as much as 6.6 billion euros in an effort to calm investors' concerns about the strength of the lender's finances.

The capital-raising project approved late yesterday by the bank's directors includes replacing the lender's cash dividend for 2008 earnings with 3.6 billion euros of new shares, and selling 3 billion euros of convertible securities.

Helping Banks

In the U.K., Darling said the government, which took over Bradford & Bingley Plc last week, is ready to offer further support to banks that may get into financial difficulty. He did not rule out a further injection of capital for failing institutions.

``We are ready to do whatever it takes, and that is, we've put money in to help banks generally,'' Darling told the British Broadcasting Corp.'s Sunday AM program. ``There are other measures we will be taking too, and I will announce them when we are ready to do that.''

Darling's boss, Prime Minister Gordon Brown, was among the leaders gathered in Paris, along with Berlusconi, Luxembourg Prime Minister Jean-Claude Juncker, European Commission President Jose Manuel Barroso and European Central Bank President Jean- Claude Trichet.

Severe Crisis

``The good news out of the Paris meeting is that the European heads of state now recognize the severity of this crisis,'' Goldman Sachs Group Inc. economists Natacha Valla and Erik Nielsen said in a note to investors. ``A pan-European approach would be much preferred, but given the urgency and complexities of organizing such measures between different fiscal regimes, national measures -- coordinated to the extent possible -- might still be good enough.''

The leaders agreed on policy recommendations touching on regulation and accounting and said they'd press for looser enforcement of budget and competition rules at the EU level.

They said they would seek to harmonize guarantees of deposit levels. The U.K. bank regulator increased its insurance ceiling to 50,000 pounds ($88,300) per account from 35,000 pounds to stem a flow of funds to Ireland after officials in Dublin guaranteed all debts and deposits of its banks.

Policy Recommendations

Anticipating increased spending, declining tax revenue, and government bank takeovers, European leaders called for ``greater flexibility'' in the application of the EU budget ceiling.

European finance ministers last month pledged to keep their budget deficits below 3 percent of gross domestic product even as the economic slowdown dents tax receipts and boosts welfare payments.

The leaders said they want to allow banks to keep some assets valued as if they'd be held until maturity, instead of having to review their value each quarter.

They also said they want to change accounting rules that require banks to review their holdings each quarter and report losses when the values decline, the so-called mark-to-market standard. Banks worldwide have written down more than $580 billion since last year, according to data compiled by Bloomberg.

To contact the reporter on this story: Sandrine Rastello in Paris at srastello@bloomberg.net