ROME — The German government led a €50-billion ($74-billion Canadian) bailout of the country's second-biggest commercial mortgage lender late Sunday night and promised to guarantee all personal bank deposits in a bid to stem a spreading European financial crisis.
The guarantee on cash and savings accounts, similar to the plan devised last week by the Irish government, was announced Sunday night while Germany's top finance and banking officials frantically hammered out a rescue plan for Hypo Real Estate Holdings before today's market opening.
Other European countries are expected to copy the German and Irish account guarantees to prevent a run on their banks. Britain's guarantee could come as early as today.
The moves are intended to shore up confidence in financial institutions and calm jittery consumers as Europe is swept up in the global credit crisis and stock-market plunge.
The Hypo rescue attempt, the bank-account guarantees and a late-night ownership overhaul at Fortis, the ailing Belgian banking giant, were dramatic evidence that the epicentre of the financial crisis is shifting with alarming speed to Europe from the United States. Economists say Europe's banks are highly vulnerable because their assets are backed by even less equity than those of U.S. banks.
European leaders meeting in Paris vowed to protect Europe's banks, but fell short of promising a wide-reaching bailout fund like the $700-billion (U.S.) plan approved in Washington last week.
Their failure to agree to an EU-wide plan showcased the divisions in Europe on how to deal with the crisis.
In an open letter to European leaders on Oct. 1, hundreds of economists criticized the “one bank at a time” rescue effort and urged a broad, European Union-led scheme to recapitalize the banks.
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.
Hypo shocked the market late Saturday when it said the rescue it unveiled only a week ago – as five European countries were hammering together bank bailout plans – “is currently withdrawn.”
German Chancellor Angela Merkel moved quickly to try to restore confidence as news of the failure of Hypo's original rescue package rattled regulators, investors and bank customers across Europe.
“We say to savers that their deposits are safe,” she said.
German Finance Ministry spokesman Torsten Albig said the unlimited guarantee covered some €568-billion in savings and chequing accounts and in other deposits.
The announcement of the revamped Hypo rescue did not come until almost midnight in Germany as rumours swirled throughout the evening that the bank's options would range from nationalization – the tactic used by the British government to protect customers of Northern Rock bank early this year and mortgage lender Bradford & Bingley last week – to its sale in whole or in parts.
The German government and the banks agreed to raise the bailout package to €50-billion from €35-billion. No other details were immediately available.
With assets of about €400-billion, Hypo is Germany's third-biggest lender by assets, behind Deutsche Bank and Commerzbank. Hypo got into trouble when its Dublin subsidiary, Depfa Bank, whose specialty is government lending, found itself unable to get short-term funding amid the credit crunch. The government and private German financial institutions hastily put together a €35-billion lifeline for Hypo.
Other big European banks were moving quickly on the weekend to prevent their shares from plunging again this week as the credit crunch intensifies. Italy's UniCredit, one of Europe's biggest banks, with assets of €1-billion, held a special board meeting Sunday to approve a plan to boost its capital base by €6.6-billion.
The two-part plan will see the bank pay dividends in 2008 with €3.6-billion in new shares instead of cash, and raise €3-billion through an equity issue that can be converted into UniCredit shares.
As UniCredit was raising capital, Fortis, the bank rescued last week by the governments of Belgium, the Netherlands and Luxembourg, said that France's biggest bank, BNP Paribas, will take control of Fortis's operations in Belgium and Luxembourg. The move came after the Netherlands on Friday was forced to nationalize the bank's Dutch businesses.
It's an open question whether the weekend's flurry of efforts to protect Europe's banks will work. The economists who signed the letter urging government leaders to draft an EU-wide rescue plan for the banks said, “trust among financial institutions is disappearing; fear may spread. … Unless Europe's leaders immediately unite to address this crisis before it spreads out of control, they may find themselves fighting over how best to salvage the aftermath.”
With reports from Reuters and Associated Press
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