Battle To Save Eu Banks From 'total Collapse'

The Age

Monday October 13, 2008

David Hirst - David Hirst is a journalist, documentary maker, financial consultant and investor. His column, Planet Wall Street, is syndicated by News Bites, a Melbourne-based sharemarket and business news

Britain and Germany are leading desperate attempts to keep Europe afloat, writes David Hirst.

GERMANY is expected to announce an $820billion bail-out plan for its banks as crisis talks continue across Europe.

In Britain there were talks between the Treasury, the Financial Services Authority, the Bank of England and heads of four retail banks as the British Government demanded the banks come clean on likely future losses as part of a deal to refinance the big banks.

German Chancellor Angela Merkel was heading to Paris to present European heads of state with a financial bail-out plan for Germany, according to The Wall Street Journal.

The Dow Jones news service said the German Government was considering a total bail-out plan of up to $US536 billion ($A820billion), including state guarantees and options to get direct stakes in banks.

And the BBC reported that, after a meeting with President George Bush, Intentional Monetary Fund chief Dominique Strauss-Kahn warned the world's financial system was on the "brink of collapse".

Speaking in Washington, DC, Mr Strauss-Kahn said: "Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown."

In Britain, The Times reported online: "The UK Government will launch the biggest rescue of Britain's high-street banks tomorrow when the UK's four biggest institutions ask for a #35billion ($A91 billion) financial lifeline.

"The unprecedented move will make the Government the biggest shareholder in at least two banks."

The banks include Royal Bank of Scotland (RBS), whose market value has fallen to below #12 billion, and which has asked the Government to underwrite a #15 billion cash call, and Halifax Bank of Scotland (HBOS), Britain's biggest provider of mortgages, which is seeking up to #10 billion. The Times reported the scale of the fundraising could lead to trading on the London Stock Exchange being suspended. This would give the market time to digest the impact of the moves.

An economist, who declined to be named, said: "This is the biggest risk of the UK's balance sheet ever undertaken. No one knows the extent of the toxic assets to which these banks are exposed."

Separately, the future of US investment bank Morgan Stanley is also in doubt following a sharp sell-off of shares and warnings of a possible credit downgrade from Moody's, the ratings agency.

But US Treasury Secretary Henry Paulson has pledged to stand behind Morgan Stanley and Goldman Sachs. Morgan Stanley's market value has slumped to $US13 billion. German magazine Der Spiegel reports that the Swiss and indeed European banking giant UBS and other Swiss banking houses may be in trouble. The Financial Times reports that Germany, in a dramatic change of course, is following the English approach of directly injecting money into the embattled banks.

Germany is drawing up a multibillion euro contingency plan to shore up its banking system, which could see the government guarantee interbank lending while injecting money into its largest banks.

And the possible closure of international markets for an extended period, rather than weekends, though rejected yesterday by the White House, is gaining support.

The British approach is also closer to being adopted by the US, which is recognising that the $US700 billion bail-out package will not work in its current form, and may inject equity directly into banks.

Meanwhile, Italian Prime Minister Silvio Berlusconi suggested at the weekend that international markets be suspended. The Spectator reported that there was growing support for a market moratorium. The Washington Post backed the idea, saying: "Markets could use a time out just about now, something that lasts longer than a weekend and gives policymakers around the world the chance to get a good night's sleep and evaluate their options without feeling like they have to respond to every movement flashing across their Bloomberg screens."

Bank of England governor Mervyn King has told the banks to ask for more than they need. This is to make sure their capital position is strengthened enough to absorb shocks and to withstand a long recession. Further capital is also available and the Treasury has increased the total amount to #75 billion.

It is thought all parties believe a co-ordinated rescue is the way forward. It is hoped final details will be thrashed out by this morning.

The Times online quoted banking sources as saying the Bank of England has been pushing for early action by the banks on raising capital. "They say there's no excuse for delay," a banking source said. "We need to get on with it."

In addition, Barclays is trying to raise about #3 billion from Middle Eastern sovereign-wealth funds, including the Qatar Investment Authority, as well as Asian investment houses, including Japan's Sumitomo Mitsui Banking Corporation. It was determined on Friday night that the Lehman Brothers collapse will cost providers of credit default swaps an estimated $US233 billion payout - which must be paid in the next two weeks.

At the weekend, America's chief accounting body, the Financial Accounting Standards Board, revealed it would suspend mark-to-market rules to take account of extreme conditions. Institutions will be able to use their own estimates of an asset's worth instead.

The Times reports a contingency draft, closely modelled on the British initiative, marks a dramatic political turnaround for Europe's largest economy after Chancellor Merkel and Germany's Finance Minister, Peer Steinbruck, both ruled out a sector-wide state rescue for banks this week.

Der Spiegel continues: "Many are fearful of the consequences should UBS capsize. Switzerland's GDP totals 512billion Swiss francs ($A688 billion). UBS' balance sheet adds up to 2 trillion Swiss francs - four times as much. Even Switzerland's second-biggest bank, Credit Suisse, oversees assets totalling 1.2 trillion Swiss francs. Together UBS and Credit Suisse have over 640 billion Swiss francs in outstanding loans."

The former editor-in-chief of the German weekly Die Zeit, Roger de Weck, wrote in the Swiss periodical Das Magazin: "We owe this crisis an uncomfortable revelation: UBS and Credit Suisse are too big for Switzerland. If they went bankrupt, a flourishing country would be ruined."

David Hirst is a journalist, documentary maker, financial consultant and investor. His column, Planet Wall Street, is syndicated by News Bites, a Melbourne-based sharemarket and business news

© 2008 The Age

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