Europe pushed to produce its own rescue plans

Three major lenders were rescued on Monday as the global credit crisis spread.

Europe had no time Monday to monitor the US attempt to bail out its banking sector. It was frantically dealing with new leaks in its own financial boat.

The collapse of three big lenders in Britain and Western Europe amplified concern over a domino effect across global banks, and gave rise to a new key question: Will Europe follow America's lead in underwriting its teetering banking sector?

In effect, it already has on a case-by-case basis. Governments in Britain, Belgium, the Netherlands, and Luxembourg were forced to intervene Monday to rescue banks, plowing billions of taxpayers' dollars into two failing institutions.

The part-nationalization of the Dutch-Belgian Fortis and Britain's eighth-largest bank, Bradford and Bingley, demonstrated that Europe's leaders are no less resolute than their American counterparts when it comes to bank rescues, and even the expectation of Congressional approval of a $700 billion US bailout (which failed to pass Monday afternoon) did not helped bank balance sheets.

"The cocktail of news hasn't been optimistic," says Richard Hunter, a market analyst with stockbrokers Hargreaves Lansdown. "There are other factors at play in terms of what's happening with Fortis and Bradford and Bingley, so [the US bailout] certainly is not the panacea that some people were hoping for."

He adds that in its current form, the US bailout still leaves room for uncertainty, including how long the bailout will last and how quickly the funds will be released.

Justin Urquhart Stewart, director of Seven Investment Management in London, adds: "There is a realization that $700 billion doesn't solve anything but just buys us time." And it should give investors pause. He notes that the price tag is equivalent to the gross domestic product of a medium-sized nation. "You could buy the Netherlands for that, and get a free tulip thrown in," he says.

Other market watchers say the impending US bailout is not getting a warm reception in the global markets "because of the way politicians used it as a parade or an opportunity for Congress to steal some limelight," says Mike Lenhoff, a strategist with Brewin Dolphin, a brokerage firm in London. "It's been an anticlimax, but now that it's on the runway, when Congress approves it, it will help markets."

"It may not be the perfect policy response to what ails the system but it's the only one on offer," Mr. Lenhoff adds.

European leaders have welcomed the American rescue plan, while making it clear that they do not see a multiparty, pan-European response as the appropriate way to deal with failing banks here. French President Nicolas Sarkozy, who is due to huddle with French bank chiefs on Tuesday, said simply: "We must not give way in the face of destabilization. We have to support the banks."

British Prime Minister Gordon Brown, who offered his support in person to President Bush last week, noted that the American economy "is different from Britain," and that "each country will do what is necessary for their country to deal with the problems in different ways."

Ready examples were available across the continent on Monday.

The Belgian, Dutch, and Luxembourg governments agreed to funnel 11.2 billion euros ($16.4 billion) into the cross-border banking and insurance company Fortis to save it after its stock plummeted.

Britain cobbled together a deal for Bradford and Bingley, its leading buy-to-let mortgage provider. Its 197 retail branches will be sold to Spanish banking giant Santander, while the British government will take over its loans at a cost of £41 billion (roughly $80 billion) to the taxpayer.

Iceland, Denmark, and Russia all arranged smaller bank rescues of their own, while Germany orchestrated a 35-billion-euro loan for Munich-based lender Hypo Real Estate. Trading in shares of UniCredit, an Italian bank, were suspended.

European banks are suffering from the twin factors hitting US counterparts: the toxic subprime loans that were sold worldwide and are leaving large holes in balance sheets, and secondly, no one can borrow their way out of trouble because no one will lend cash when they don't know who is about to go bust next.

Loss of customer confidence, such as that which hit Britain's Bradford and Bingley and Northern Rock bank before it, merely compounds the woes.

On Monday, investors again rushed for the safety of US Treasury bills – rather than corporate stocks and bonds – while banks charged more to lend to one another. When European and US central banks do pump cash into the system – as they have in recent days – banks are hoarding the funds rather than lending them out. Those are indications that fear is still gripping the banking system.

Europeans often say that their socially-oriented capitalism is more genteel and less cavalier than its profit-obsessed US counterpart. But analysts suggest that these will not be the last European finance houses to tumble.

Mr. Urquhart Stewart says that while Europe hasn't had the same housing boom and bust that America experienced, its economy is slowing, and numerous banks have been penalized by the double whammy of a global liquidity crunch and bad loans.

"A lot of institutions have been tempted towards investment banking, like Fortis, because of the profits you could apparently make over a short period of time," he says. "There probably are some other Fortises out there. I wouldn't be surprised if there was a French bank suffering. I fear I can see a plume of smoke rising over Paris."

Mr. Lenhoff says it might be asking too much to expect a concerted European response. After all, Mr. Bush and US Treasury Secretary Henry Paulson had to deal with only two political parties. Multiply that by the 27 countries of the European Union, and throw in the ponderous European Central Bank (ECB) as well, and decisive action may be harder to achieve, he says.

"Maybe the governments, along with the ECB, will have to launch something very similar, but I imagine that would be harder, not just because we have diverse countries, but because of a central bank less willing to respond like the Federal Reserve has," Lenhoff says.

David Owen, eurozone chief economist for Dresdner Kleinwort, a European investment bank, says Europeans are reluctant to emulate the Paulson plan, but adds that the ad hoc resolution for Fortis was encouraging. "The move with Fortis illustrates that they are able to move quickly to part nationalize a bank across three countries; the market should take some comfort from that," he says.

Whatever the magnitude and frequency of the bailouts required, the overall impact on the economy is likely to be severe. Mr. Owen points to a recent IMF working paper which studied 42 other systemic banking crises over the past four decades. The two principal conclusions: that failing financial institutions almost always require the taxpayer to bail out the banker, and that the knock-on effect is, as Owen puts it, "an output loss, as credit is restrained in the wider economy."