UPDATE: European Banking Crisis Deepens As Rescue Deals Continue

By Simon Kennedy

LONDON (Dow Jones) -- The unprecedented crisis for European banks deepened severely, leading to new rescue packages for firms including Fortis and Hypo Real Estate as Germany joined the growing list of countries to guarantee bank deposits.

The string of fresh problems for lenders came as politicians pledged to continue bailing out financial institutions but stopped short of a collective rescue fund of the type planned in the U.S.

They also sent a shockwave through European stock markets early Monday, with the Dow Jones Stoxx banking sector index down 6.5%.

The broader European indexes traded sharply lower as the bearish view spread to other sectors. The U.K.'s FTSE 100 index fell 5.7%, surrendering 286.12 points to 4,694.13.

Among the latest rescue deals is a shotgun marriage of BNP Paribas and Fortis .

Early Monday, BNP it will take control of Fortis operations in Belgium and Luxembourg as well as the company's international banking franchise in a deal valued at 14.5 billion euros ($19.7 billion) in cash and shares.

The deal includes the acquisition of an insurance business direct from Fortis as well as banking stakes from the governments in each country. It comes just a week after a coordinated government bailout of Fortis as confidence in the bank collapsed.

WestLB analyst Christoph Bossmann downgraded BNP Paribas to add from buy, saying that the deal should be positive in the long term but that there's limited upside for the French bank in the short run and that the deal will create risks arising from the integration.

Governments step in

Meanwhile, German authorities also had to resuscitate a rescue plan for Hypo Real Estate after an earlier deal collapsed.

The new package, increased to 50 billion euros ($68 billion) from 35 billion euros, came as German Chancellor Angela Merkel gave an explicit guarantee for retail banking deposits. Merkel said she could not allow problems surrounding Hypo Real estate to affect the broader banking system.

Shares of Hypo Real Estate fell 36% in Frankfurt, while BNP Paribas slipped 4.6% in Paris. Trading in Fortis shares was suspended.

Analysts at UniCredit questioned why Hypo needed such a big increase in its bailout package after management said the original deal would see it through until the end of 2009.

"Even if the crisis around the company may have triggered some additional liquidity outflows, we think that this should have been clearly anticipated and therefore we see it as not certain that the same won't apply to the new credit line," the UniCredit analysts said.

Germany joined Ireland and Greece in guaranteeing deposits, and the list grew longer as Denmark issued a similar pledge early Monday.

On Sunday, the Dutch market regulator became the latest authority to ban short-selling in financial stocks, citing the "extraordinary" market circumstances.

Last Friday, the U.K. raised the level of deposits secured under its system to 50,000 pounds per person. Chancellor Alistair Darling is due to address parliament with further measures to support U.K. banks.

In Iceland, officials are trying to hammer out a rescue plan for its distressed banking industry that could involve injecting as much as 10 billion euros into the sector.

Political leaders from the U.K., Germany, France and Italy met on Saturday to discuss the crisis. While stopping short of agreeing to a bailout along the lines of the $700 billion U.S. deal, they pledged to continue supporting individual banks.

UniCredit raising cash

In Italy, UniCredit is also planning to strengthen its capital by issuing convertible securities and paying its dividend in shares. The move should raise around 6.6 billion euros.

The bank said Monday it will take other steps, including restructuring investment banking and putting on hold new branch openings that had been on tap for Eastern Europe.

Shares of UniCredit fell about 10% when trading resumed mid-morning following an early suspension.

(END) Dow Jones Newswires

October 06, 2008 08:15 ET (12:15 GMT)


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