European banking collapse including nationalisation in UK and Iceland

On Friday, I warned that European government officials like Peer Steinbrück of Germany should refrain from chastising the U.S. and the U.K. over problems in banking. After all, Europe is next.

At the weekend, the fireworks in Europe began in earnest. Yesterday, top German finance blogger Egghat sent me an email, warning me that “Hypo Real Estate (DAX component) reportedly [was] in severe liquidity problems.” He said, echoing my sentiments of Friday, “so much for Steinbrücks and Merkels Schadenfreude last week.” His post in German on Hypo is here.

Then, we awoke his morning to the nationalisation of Bradford & Bingley by the UK Government, of which I warned on Friday. and the nationalisation of Glitnir Bank in Iceland, that country’s third largest bank. Needless to say, European markets are seeing heavy selling with the FTSE in the UK down 3% and the DAX in Germany down over 2 1/2%.

With the US Government bailout, things have not stabilized. The BBC reports on the B&B nationalisation, the Glitnir and the Hypo Real Estate situation as well. On B&B, they say:

Mortgage lender Bradford & Bingley (B&B) is to be nationalised, the government has confirmed.

The government will take control of the bank’s £50bn mortgages and loans, while B&B’s £20bn savings unit and branches will be bought by Spain’s Santander.

Chancellor Alistair Darling said investors had lost confidence in B&B and the government was moving to stabilise the wider financial sector.

He also said that taxpayers were being protected from any B&B losses.

‘Lost confidence’

“Following recent turbulence in global financial markets, Bradford & Bingley has found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution,” said the Treasury.

It added that the move would protect savers’ money and that B&B’s branches, call centres and internet operations would “be open for business as usual to provide continuity of service to customers”.

Prime Minister Gordon Brown said the move showed the government would “do whatever it takes to ensure the stability of the British financial system”.

BBC business editor Robert Peston said it was a good deal for taxpayers, and that the risk was “quite close to nil”.

Chancellor Alistair Darling told the BBC that the government had moved to nationalise B&B “to provide the stability” that the UK financial sector needs.

Mr Darling added that under B&B’s nationalisation, taxpayers were protected from any losses because of the Financial Services Compensation Scheme.

This means that if B&B’s remaining assets prove insufficient, the balance will ultimately be paid by the wider UK banking sector, although Mr Darling said that possible scenario remained a long way down the line.

“We are not going to do that immediately, because in the current climate that would be absolutely daft,” said the chancellor.

“But it does mean that in future, as things get better, if there is a shortfall then we will collect it from the industry.”

Shadow Chancellor George Osborne told the BBC that he would study the exact details of the deal, but that protecting taxpayers had to be the main priority.

‘Good news’

Abbey, which is part of Spanish banking group Santander, is paying £612m to buy B&B’s savings business and 197 branches. –BBC News

The Icelandic situation has less detail. The BBC merely says:

The Icelandic government has taken control of the country’s third largest bank, Glitnir, after it faced short-term funding problems.

The government has bought a 75% stake in the bank for 600m euros ($860m £478m) to ensure stability of the bank during the current financial turmoil.

Glitner is expected to operate as normal and the government said it did not intend to hold the stake for long.

It is the first major Icelandic banking nationalisation of the current crisis. –BBC News

And on the Hypo Real Estate case, big news in Germany, the BBC says:

Shares in German lender Hypo Real Estate plunged after it struck a loan deal with a consortium of German banks.

Its shares lost three-quarters of their value, falling to 3.39 euros, before a slight revival to 63% down at 5 euros.

The firm did not reveal the names of the loan banks, or even the deal amount, which may be up to 35bn euros (£27.8bn,$51.21bn) say media reports.

Hypo has been badly affected by the financial markets crisis as it borrows heavily from the interbank market.

It is thought the deal has ensured financing for the Hypo until the end of next year.

“Hypo Real Estate Group will not need to go back to the unsecured money market for its refunding in the foreseeable future,” said chief executive Georg Funke. –BBC News

I will be looking to update information on these situations as we move forward. See the BBC article links below for the full articles. But, the long and short of these events is confirmation of the global nature of this crisis. This is not a credit crisis contained to the ‘sub-prime’ sector nor is it a ‘U.S.- and U.K.-centric crisis. It is a global credit crisis of similar proportions to the Great Depression and the news cycle on financial sector disruptions and real economy effects is far from over.

Sources FTD: Hypo Real Estate droht Kollaps – Egghat’s Blog (in German) Hypo Real Estate droht Kollaps – Financial Times Deutschland (in German) B&B nationalisation is confirmed – BBC News Iceland nationalises Glitnir bank – BBC News Hypo shares crash after loan deal – BBC News

Originally published at Credit Writedowns and reproduced here with the author’s permission.