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Europe rushes to save banks

Mon., Oct. 6, 2008, midnight

Germany latest country to act

STOCKHOLM, Sweden – Germany became the latest country to move to allay fears about the financial meltdown, enhancing a rescue plan for Hypo Real Estate AG and guaranteeing private bank accounts as European governments scrambled on their own Sunday to save failing banks.

Chancellor Angela Merkel vowed she would not let the failure of any company disrupt the German economy.

“We will not allow the distress of one financial institution to distress the entire system,” she told reporters.

Hours later, her government announced a new bailout package totaling 50 billion euros, or $69 billion, for Hypo Real Estate, Germany’s second-biggest commercial property lender.

The German Finance Ministry and private banks reached a deal late Sunday to infuse an additional line of credit worth up to 15 billion euros into the embattled real estate giant, expanding on an earlier 35 billion euro bailout plan that would have found the government and private banks splitting the bill.

The earlier deal fell apart Saturday when Hypo announced that a consortium of unnamed financial institutions had backed out. That prompted banking executives and lawmakers to convene in the capital for feverish talks toward the new deal they unveiled late Sunday.

Sunday’s emergency meeting came a day after Europe’s four major economic powers called for tighter regulation in a bid to stop the fiscal bleeding wrought by turmoil on Wall Street – though Germany, France, Britain and Italy shied away from advocating a massive bailout akin to that in the United States, where Congress approved a $700 billion plan last week.

European governments have pumped billions of euros into banks to keep them afloat over the last week, trying to assure savers their money was safe and avert a panic that has frozen lending across the world.

The German Finance Ministry said in a statement that the new deal reached Sunday would “strengthen the financial community of Germany in difficult times.”

Earlier Sunday, Germany joined Ireland and Greece in taking drastic independent measures to protect its private citizens by guaranteeing all private bank and savings accounts as well as time deposits, or CDs.

Finance Ministry spokesman Torsten Albig said the unlimited guarantee covered some 568 billion euros in investments.

At the same time, Belgian Prime Minister Yves Leterme said that France’s BNP Paribas SA had committed to taking a 75-percent stake in Fortis NV.

Leterme said the Belgian and Luxembourg governments would, in turn, take a blocking minority share in BNP Paribas.

The deal came after two days of closed-door talks between the Paris-based bank, Fortis and government authorities in an effort to restore confidence in the company before markets opened today.

In Iceland – particularly hard-hit by the credit crunch – government officials and banking chiefs were discussing a possible rescue plan for the country’s overstretched commercial banks.

British treasury chief Alistair Darling said he was ready to take “pretty big steps that we wouldn’t take in ordinary times” to help the country weather the credit crunch.

In the past year the government has nationalized struggling mortgage lenders Northern Rock and Bradford & Bingley.

“The European banking industry is feeling the wind of default blowing from the other side of the Atlantic,” said Axel Pierron, senior vice president at Celent, a Boston, Massachusetts-based financial research and consulting firm.

The erosion has also injured overall confidence and caused concern among investors, politicians and the European public.

The leaders of Germany, France, Britain and Italy met Saturday to discuss the meltdown that has leapfrogged across the Atlantic from the U.S. to Europe. Their failure to agree to an EU-wide plan Saturday showcased the divisions in Europe on how to deal with the crisis.

France had suggested a multibillion-euro, EU-wide government bailout plan but backed off after Germany said banks must find their own way out.

French President Nicolas Sarkozy’s top adviser, Claude Gueant, insisted that a “common European plan” had come out of the summit.

“What is certain and what the citizens of France and Europe must know is that their (banking) establishments won’t be left in difficulty,” he told Europe-1 radio on Sunday.

Icelandic banks expanded rapidly after deregulation of the domestic financial market in the 1990s and have combined foreign liabilities in excess of 100 billion euros – dwarfing the country’s gross domestic product of 14 billion euros.

The government last week took over Iceland’s third-largest bank, Glitnir, a decision that prompted major credit ratings agencies to downgrade the country’s four major banks and its government rating.

Looming large was a growing sense that the Federal Reserve and Europe’s major central banks – which have been flooding euros and dollars to banks that have grown increasingly unwilling to lend money even to themselves – were ready to institute emergency cuts to their benchmark interest rates this week.

None of the banks, including the European Central Bank and Bank of England, have commented on potential rate hikes or cuts. But analysts believe the Bank of England, which meets this Thursday, will likely lower its rate below 5 percent. The ECB left its rate unchanged at 4.25 percent on Thursday, but opened the door to a rate cut.

Robert Brusca, chief economist at the New York-based Fact and Opinion Economics, said that the ECB does issue such a cut it would be a sign “that they’re really, really scared.”


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