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Europe’s banks in no hurry for bailouts

Posted by smeddum on October 17, 2008

Europe’s banks in no hurry for bailouts
By Carter Dougherty and Julia Werdigier
Friday, October 17, 2008 IHT
FRANKFURT: Germany and France on Friday gave final approval to their costly bank rescue packages, but many beleaguered European banks were in no hurry to sign up for the government bailouts.

Given that a number of major financial competitors already have the benefit of state backing, though, some of the big names of European banking, including ING of the Netherlands and Unicredit of Italy, may not be able to resist pressure from investors to accept government aid, strings and all.

On Friday, UniCredit arranged a capital injection from Libyan state investors in an effort to improve its balance sheet without Italian government support.

Despite the new legislation, there were few signs that continental European governments were planning to force banks into a state recapitalization, as was the case in the United States and Britain over the past week.

Many banks are reluctant to line up early for cash from governments because of the message it might send to financial markets and of executives’ worries about accepting greater limits on decision making and pay.

That motivation seemed to explain why Barclays, the British bank, sought so hard last weekend to stave off government intervention.

Under pressure to improve its capital cushion, Barclays was able to avoid a government investment only by presenting ironclad commitments from private investors to put in £1 billion, or about $1.7 billion. That convinced regulators that its overall capital increase, worth £6.5 billion, was credible.

Barclays cited several reasons for turning down government help, but the bank’s chief executive, John Varley, said the biggest was a desire to remain competitive by retaining flexibility to react to market conditions.

“The key for me is to be in a position where we can have freedom of choice and maneuver,” Varley said. “The others will be constrained.”

But investors, by pounding several financial stocks lately, notably the Dutch banking and insurance group ING, are sending the message that they expect more of them to turn to government shelter before the crisis is over.

“Some still believe they have sufficient strength and can meet capital ratio requirements through other means,” said Howard Wheeldon, senior strategist at BGC Partners in London. “Markets seem to doubt that.”

The German finance minister, Peer Steinbrück, hinted strongly Friday that he would focus first on the interbank lending guarantees, which take up 80 percent of the German package, which totals €500 billion, or $670 billion. The plan also provides money for the government to take direct stakes, but it limits the pay of top executives at banks that take cash to €500,000.

The crisis is “above all a liquidity crunch,” Steinbrück said, explaining why the recapitalization investments would be “a second pillar” of Berlin’s strategy.

The French plan calls for as much as €320 billion in lending to banks, with a more limited €40 billion set aside to take stakes in French financial institutions. The government announced that Michel Camdessus, who was managing director of the International Monetary Fund during the Asian financial crisis of the late 1990s, would run the program.

In Germany, with the legislation now through, the government is working on specific rules on how to run its fund, which will charge 2 percent to insure interbank lending. They are to be ready Monday, officials said.

No German bank has asked for cash in any form, nor has Steinbrück, whose ministry will run the plan, insisted that they take it, said one bank lobbyist, who requested anonymity because the details were not final.

But the plan has clearly led German banks to consider all their options, since their British and American counterparts are getting state money to improve their capital position. Investors and customers around the world are now eager to see that banks have capital ratios well above regulatory minimums, German executives said.

“We need to see how things develop, and what happens in other countries,” said Reiner Rossmann, a spokesman for Commerzbank, a major German lender. “It’s also a competitive issue at the end of the day.”

Analysts said it could be a short hop from looking at the plan to taking money, especially with governments wanting to make good on their promises to prevent the failure of any major bank.

“It has become a political matter to make banks overcapitalized, so that there is no doubt they can survive a recessionary environment,” said Simon Adamson, a banking industry analyst at CreditSights in London. “And the banks are not in a position to resist.”

Landesbanken, regional German lenders that have pulverized cash in bad investments linked to the U.S. mortgage market, are thought to be at the top of the list. But Steinbrück has said the government would not use the rescue package to force changes at these public banks.

In Britain, where Royal Bank of Scotland, Lloyds TSB and HBOS were given little choice, Barclays is seeking to maintain its independence. But the others will be protected in a way that Barclays is not.

“Barclays may maneuver quite well through this as a result of its decision, but they’re out there on their own now,” said Richard Hunter, head of British equities at the fund manager Hargreaves Lansdown in London. “In the presence of future shocks, they could be exposed.”

Barclays just purchased the American business of Lehman Brothers, and it will need to award some large pay packages to retain some of Lehman’s bankers, something the government would almost certainly frown upon. It might also object to the acquisition of more distressed assets.

European cooperative banks, which are owned by their members and control about a fifth of the European retail market, said Wednesday that they would open a €15 billion credit line to one another for unsecured interbank lending, precisely the market that has dried up during the crisis.

“This initiative from leading European banks aims at restoring confidence in the banking sector from within,” said Walter Rothensteiner, chief executive of Raiffeisen Zentralbank, an Austrian lender.

Other European banks were adjusting to the new realities of finance on Friday in different ways.

UniCredit, the Italian bank whose stock was pummeled in recent weeks, turned to three Libyan state banks, which increased their stake to 4.2 percent, worth about €1.2 billion. The Libyans will also buy an additional €500 million in UniCredit’s coming share sale.

Josef Ackermann, chief executive of Deutsche Bank, used the forum of Germany’s largest tabloid newspaper, Bild, to announce he would forgo his bonus this year as “a very personal sign of solidarity.”

What that will cost him will depend on Deutsche’s financial performance. Last year, he got €8 million in performance-based pay, plus €4.5 million under a separate incentive plan. Three other top executives will also abstain from bonuses this year.

Shares in ING, the biggest financial services company in the Netherlands, fell 27.5 percent in Amsterdam on Friday as investors became increasingly concerned about the company’s financial strength. ING said Friday that it would post a €500 million loss in the third quarter because of market-driven write-downs.

The Netherlands has earmarked €20 billion to strengthen Dutch financial institutions, but they have also shunned their government’s bailout fund, Finance Minister Wouter Bos said.

Goldman Sachs, which rates ING a “conviction sell,” said in a note that ING needed to raise more capital and warned of the difficulty in trying to do so in a turbulent market.

Carter Dougherty reported from Frankfurt and Julia Werdigier from London.

Uncertainties in U.S. bailout
Even as the U.S. government moves to plug holes in American banks, new gaps keep appearing, The New York Times reported.

Citigroup and Merrill Lynch reported fresh multibillion-dollar losses on Thursday, with the total write-downs of $323 billion for the nine largest U.S. banks exceeding all of the combined profits they earned in recent years.

The deepening losses underscore a crucial question about the government’s plan: Will lenders deploy their newfound capital quickly, as the Treasury hopes, and unlock the flow of credit through the economy? Or will they hoard the money to protect themselves?

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