Markets in crisis as Europe stares into banking abyss

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THE global credit crisis has triggered the rescue of five leading European banks and a near-shutdown of the region's credit markets.

"We are all staring into the abyss," said the German Finance Minister, Peer Steinbrueck.

The Dutch-Belgian bank Fortis, Britain's Bradford & Bingley and Iceland's Glitnir were all partially or fully nationalised after failing to roll over debts in the short-term money markets, while several nations pledged support for the Franco-Belgian lender Dexia after the share price collapsed on reports of a capital shortage.

The Belgian Prime Minister, Yves Leterme, said accord had been reached between Belgium, France and Luxembourg to inject €6.4 billion ($A11.5 billion) into Dexia, founded in 1996 as a merger of France's Credit Local and Belgium's Credit Communal. While it specialises in local government finance, it also has 5.5 million individual clients in Belgium, Luxembourg, Slovakia and Turkey. "The European financial sector is on trial: we have to support our banks," said the French President, Nicolas Sarkozy.

Germany's Hypo Real Estate, a commercial property lender, was rescued with a €35 billion lifeline from a consortium of local banks. The lender has $US560 billion in liabilities, almost as much as Lehman Brothers. Hypo Real's share price fell 74 per cent, setting off an exodus from financial stocks in Frankfurt. Commerzbank fell 23 per cent and Aareal Bank was off 43 per cent.

Europe's credit markets have come close to seizing up as three-month Euribor borrowing rates jumped to a record 5.22 per cent.

"The inter-bank market has collapsed," said Hans Redeker, currency chief at BNP Paribas. "We're now seeing a domino effect as the credit multiplier goes into reverse and forces banks to cut back lending to clients." Mr Redeker said the latest twist was a move by banks to deposit €28 billion in funds at the European Central Bank in a panic flight to safety. This has jammed the mechanism used by the authorities to shore up the system.

"The ECB is no longer able to inject liquidity because the money is just coming back to them again. This is extremely serious. If monetary policy is no longer working, there is a risk that the whole system will blow up in days," he said.

Analysts say Mr Steinbrueck may have spoken too soon when he crowed last week the US would lose its status as a superpower as a result of this crisis. The German economy is also in deep trouble.

The EU lacks a single treasury to take charge in a fast-moving crisis, leaving a patchwork of regulators and conflicting agendas.

The chief economist at ING in Brussels, Carsten Brzenski, said the global crisis was now engulfing Europe with devastating speed. "Key markets are not functioning properly. The Europeans thought the sub-prime crisis was just American rubbish that the US should clean up itself, but now they are finding out that it is their rubbish, too."

Data from the IMF shows that European banks have 75 per cent as much exposure to bad US housing debt as US banks themselves.

In Ireland, financial stocks staged a recovery after the Government guaranteed the deposits of six lenders.

http://business.smh.com.au/business/market...80930-4r7s.html

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Analysts say Mr Steinbrueck may have spoken too soon when he crowed last week the US would lose its status as a superpower as a result of this crisis. The German economy is also in deep trouble.

Data from the IMF shows that European banks have 75 per cent as much exposure to bad US housing debt as US banks themselves.

Tja. I'd sit down and have a nice cup of stfu until you find the gun that forced European bankers to buy that garbage.

KfW is a German government-owned development bank, based in Frankfurt...On September 15, 2008, KfW transferred €300 million ($425 million) to Lehman Brothers Holdings on the same day that Lehman filed for bankruptcy, a step that earned the bank an unflattering moniker of "Germany's dumbest bank" in the media.[1]

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Holy smoke! Are there no safety nets to prevent this kind of domino effect? If the banking system is this interdependent and fragile, there should be an international governing body that oversees risk management.