- The Washington Times - Tuesday, September 30, 2008

— European governments announced a flurry of bank bailouts from Germany to Iceland on Monday, but the rescue deals only heightened fears that the contagion from the U.S. credit crisis has much further to spread before the financial system recovers.

European shares fell heavily and money markets remained frozen with banks refusing to lend to one another for all but the shortest periods amid concern that a planned $700 billion U.S. government bailout package would not be enough to stem the crisis. A few hours later, the U.S. House of Representatives defeated the rescue package by a vote of 228-205.

“In the near term, it will be the weak ones that will be picked off,” Global Insight chief European economist Howard Archer said before the congressional vote of the expectation that more banks would collapse or need rescue.

“But, obviously, the more the turmoil and dislocation continues, the further this could spread,” he added. “We live in vicious times.”

The governments of Belgium, the Netherlands and Luxembourg took partial control late Sunday of struggling bank Fortis NV, while Britain seized control of mortgage lender Bradford & Bingley early Monday.

Germany organized a credit lifeline for blue-chip commercial real estate lender Hypo Real Estate Holding AG, while Iceland’s government took over Glitnir Bank, the country’s third largest.

Additionally, the European Central Bank joined with the U.S. Federal Reserve in doubling the credit swap line that makes dollars available to cash-hungry banks from $120 million to $240 million. The Bank of England doubled dollar availability to $80 billion, while other central banks offered smaller amounts.

Renate Brand, a banking analyst at SNS Securities, said that “it’s getting difficult for a lot of banks at once now, because mistrust is so great and so widespread.”

Ton Gietman from Petercam Securities said that markets had become so jittery that rumor and fact were being treated about the same.

“Take a company like Fortis, whose management swears high and low that they don’t have any solvency problem - and it’s still an open question whether they did or not - this market doesn’t care,” he said. “If you can’t stop your share price from falling with anything you say, you have to take some action to reassure investors and depositors.”

Analysts are closely watching Dexia, a French-Belgian specialist in lending to local governments that ran up huge losses in its U.S. operations. The bank had no comment on a report it was planning a rapid capital increase but said the board would meet Monday night to assess the situation.

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