Governments rescue Fortis but bank woes spread

The Belgian-Dutch company's stock rose when markets reopened after a weekend of high drama, but the gains were wiped out in hectic trading as bank shares across Europe fell despite agreement in the United States on a $700 billion rescue plan.

Shares in Fortis rival Dexia plunged 20 percent after a newspaper report it planned a capital increase. German property lender Hypo Real Estate plummeted 61.5 percent after it secured an emergency credit line from a consortium of banks and a substantial government guarantee.

In Britain, mortgage lender Bradford & Bingley became the second British bank to be nationalised since the global credit crunch began last year.

After emergency talks with European Central Bank President Jean-Claude Trichet on Sunday, the Belgian, Dutch and Luxembourg governments agreed to inject 11.2 billion euros ($16.4 billion) into Fortis in the first major bank crisis to hit the euro zone in 13 months of global turmoil that began in the United States.

"One can call it nationalisation, in another kind of way," Belgian Finance Minister Didier Reynders told RTBF radio.

Fortis will sell the parts of Dutch bank ABN AMRO it bought last year to Dutch rival ING in a deal expected to be finalised within two weeks, sources familiar with discussions told Reuters. ING declined comment.

"Integrating ABN AMRO was a step too far for this company to do," new Fortis CEO Filip Dierckx told a conference call.

The European Commission said Competition Commissioner Neelie Kroes was consulted on the Fortis rescue and was in close touch with the Belgian government all weekend.

"We will look at any state aid involved as a matter of urgency," EU spokesman Jonathan Todd said. Under EU rules, rescue aid must be limited to six months and to the minimum required to ensure the company's survival.

How the EU regulator handles the case will depend on whether the governments buy shares at the market price or inject new capital into the bank.

FIRE SALE AVERTED

Reynders said the Benelux governments opted for the partial nationalisation to avert a fire sale of the company, which employs 85,000 staff, after investor confidence collapsed last week and two private bidders offered paltry terms.

"We could have not intervened, but the question was whether Fortis would have survived on Monday," Dutch Finance Minister Wouter Bos told reporters.

Each government will take a 49 percent stake in Fortis banks in their respective countries. Belgium will put in 4.7 billion euros, the Netherlands 4 billion and Luxembourg 2.5 billion, the latter in the form of a convertible loan.

Fortis said in a statement it expected total negative value adjustments of about 5 billion euros after tax in the third quarter. It added its core equity would be around 30 billion euros, resulting in a 9.5 billion euro excess core equity.

Fortis's Tier 1 ratio would be above 9 percent under Basel I rules and a capital ratio under Basel II of about 13 percent.

Fortis also said it was facing an impairment from the sale of the parts of Dutch bank ABN AMRO that it acquired for 24 billion euros last year.

The most likely private bidder for Fortis, France's BNP Paribas, pulled out after offering just 1.60 euros per share, compared to Friday's closing price of 5.20, and demanding state guarantees against possible future losses, a source said.

Another source close to the talks said BNP Paribas had offered 2 euros a share and the Dutch ING Group just 1.5. "There was no serious bidder for the intrinsic value of the whole group," the source said.

The involvement of Trichet, who as ECB head is responsible for safeguarding financial stability in the euro zone, was unprecedented in a commercial bank rescue and underlined the concern for the integrity of the banking system.

Shares in Ping An, China's number two insurer, slid nearly 10 percent on Monday on fears it will have to absorb larger than expected losses from its 5 percent stake in Fortis.

TOO BIG TO FAIL

Fortis's position as the biggest private employer in Belgium and its cross-border structure made it too big to be allowed to fail. Its nationalisation dwarfs Britain's state takeover of fallen mortgage lender Northern Rock.

Fortis Chairman Maurice Lippens, accused by shareholders of concealing the bank's troubles for too long, resigned.

Fortis's precursors traded with Catherine the Great and financed the U.S. purchase of Louisiana from Napoleon. Its main constituent bank, Societe Generale, was the chief financier of the industrialisation of Belgium and the Netherlands.

The mooted ING purchase of the Dutch operations of ABN AMRO would raise competition issues because the combined firm would dominate retail banking in the Netherlands, experts said.

The problems at Fortis, whose shares dropped by a third last week on investor concerns about its liquidity and funding, stem from last year's 70 billion euro purchase of ABN with partners Royal Bank of Scotland and Spain's Santander.

Fortis has been weighed down by its 24 billion euro outlay for ABN in a market that is neither conducive to more capital increases, nor willing to pay for the assets it wants to sell.

Photo: Reuters