European governments were forced to rescue a number of financial institutions hit by the US-born crisis, sending stock markets plummeting. Washington's rejection of a $700-billion bailout caused world markets to plummet.

Only a few weeks ago, banks in the euro zone financial sector were said to be safe from the US-born financial crisis, but now, as the global financial situation gradually worsens, five European governments have had to step in to prop up financial institutions.

Separately, news emerged late Monday, Sept. 29, that the US House of Representatives rejected a $700 billion measure to rescue the failing American financial system. The bailout bill was defeated after many House Republicans ignored their leaders' pleas and voted against it. A majority of Democrats voted in favor of the plan.

"I feel they've taken leave of their senses," said European Union Trade Commissioner Peter Mandelson of US lawmakers Monday in an interview with BBC, "and I hope that in Europe we will not see politicians and parliamentarians replicating the sort of irresponsibility and political partisanship that we have seen in Washington."

European authorities in Brussels, Frankfurt and at EU member state level are scrambling to save the continent's financial system after bank stocks plunged when US lawmakers rejected a $700 billion bailout of Wall Street on Monday (29 September).

Banks are petrified of lending to one another for more than one day, requiring central banks to flood their coffers with the money they need to stay in business.

After yesterday's part-nationalisation of Belgo-Dutch banking giant Fortis and the nationalisation of the UK's Bradford & Bingley, Belgium-based Dexia, the biggest provider of lending to local governments in the world, could be the next financial institution to be rescued by taxpayers.

In an email from Belgian Prime Minister Yves Leterme, the country's federal government reached an agreement with Belgium's regional assemblies to jointly support the bank, Bloomberg News reported

PARIS: Dexia, a French-Belgian lender, received a capital injection of more than $9 billion from public shareholders on Tuesday as a deepening global credit crisis continued to shake European banks. Meanwhile in Ireland, the government backed all deposits in the country's banks.

After all-night negotiations, the Belgian government announced that it and other Belgian stakeholders would invest $4.26 billion in Dexia. The French government will contribute $1.42 billion, the French state-controlled Caisse des Depots $2.84 billion and the Luxembourg government $518.82 million, according to a statement from the Belgian prime minister's office.

Shares in Dexia, which had been suspended at the open, vaulted 18.1 percent to €8.45 in late morning trading.

"The market is encouraged, this restores confidence" said Georg Krijgh, an analyst at Rabo Securities in Amsterdam. "It shows the government is supporting the banks and makes Dexia one of most solvent in the region, with Fortis and KBC."

As the US financial crisis continues to unsettle global financial markets, Brussels has said American legislators need to start meeting their obligations. But will the strong words have any effect?

In an unusually strong statement, the European Union has called American lawmakers to order for failing to reach agreement on a $700 billion plan to shore up foundering financial institutions and markets.

"The US must take its responsibility in this situation, must show statesmanship for the sake of their own companies and for the sake of the world," European Commission spokesman Joseph Laitenberger told journalists.

The statement came after the US House of Representatives narrowly rejected the bailout plan on Monday, September 29.

French President Sarkozy was to meet with French banking and insurance chiefs Tuesday in the wake of the refusal of the US Congress to approve a finance bail-out.

The aim of the meeting at the Elysee Palace is to "review the situation of the financial institutions as well as the availability of credit to households and companies," Sarkozy's office said Monday, but the defeat in the House of Representatives of the plan to rescue the US finance sector will add urgency to the talks.

Last week, Sarkozy had vowed that the French state would come to the aid of any financial institution at risk of failing, to ensure that depositors did not lose any of their savings.

Late Monday, the governments of France, Belgium and Luxembourg agreed in principle to inject 6.4 billion euros ($9.2 billion) into the struggling Franco-Belgian financial services group Dexia.

This week Europe has fallen deeper into the credit crunch. With multi-billion euro bailout packages, Germany, Britain and the Benelux states have saved banks from collapsing.

Hypo Real Estate, Fortis, Bradford & Bingley. Three European banks nearly collapsed in the course of just two days on Sunday and Monday, showing that the Wall Street financial crisis is pulling European companies into its pincers at an ever-faster clip. With trust between banks waning, analysts believe Europe is threatened with a serious credit crunch.

 The logos of Europe's crisis banks: The crisis is accelerating here and pulling an increasing number of institutions into its pincers. In order to protect the financial system from collapse, governments across Europe are being forced to intervene. Britain, Germany, Belgium, Luxembourg and the Netherlands all began spectacular rescues at the start of the week:

• the British government nationalized large parts of mortgage lender Bradford & Bingley on Monday, taking over some €63 billion ($90.6 billion) in bad loans;

• the governments of Belgium, Luxembourg and the Netherlands nationalized large parts of wobbling finance giant Fortis;

• in Germany, the government is providing a massive loan package together with a consortium of banks to prevent the collapse of the Munich-based Hypo Real Estate.

With the forced sale of its Netherlands activities of ABN Amro, Dutch-Belgian banking and insurance company Fortis will be back were it started. In a little over a year, Fortis has changed from a prestigious financial institution to a pariah in the banking world.

AFP

Fortis headquarters in Brussels

Over-confidence, bluff and arrogance have proved an almost fatal cocktail for Fortis which was saved from collapse by a financial injection of almost €11.2 billion on Sunday.

THE WORLD FROM BERLIN 'No More Cause for Feeling Schadenfreude'

With the government bailout of Hypo Real Estate Holding Monday, the now-global financial crisis has arrived and reared its ugly head in Germany. Commentators here largely approve of the measure, but they also want more government action -- and less anxiety -- soon.

A trader in Frankfurt watches anxiously as the effects of a government rescue plan of Hypo Real Estate affects the German market. Last Thursday, German Finance Minister Peer Steinbrück stood before the German parliament and tried to assure its members that "The United States is the source of the crisis, and it is the focus of the crisis." Four days later, Steinbrück launched the largest financial rescue action in postwar Germany, offering €26.6 billion ($38.3 billion) of a combined €35 billion line of credit to bailout Hypo Real Estate (HRE), the country's second-largest commercial property lender, which had considerable business in the US real estate market.

For Germans and Europeans, the crisis has arrived. On Sunday, the governments of Belgium, the Netherlands and Luxembourg took partial control of struggling Benelux bank Fortis. On Monday, Britain seized control of mortgage lender Bradford & Bingley, and Iceland's government took over Glitnir, the country's third-largest bank.

Governments across Europe have continued to prop up the battered financial sector, with Dexia, the Belgian-French financial services group, receiving more than $9bn from the Belgian, French and Luxembourg treasuries.

Facing the worst financial crisis since the Great Depression, global central banks scrambled again on Tuesday to try to relieve a severe squeeze in money markets by more than doubling the amount of funding to $620 billion.

In Ireland, the government announced a blanket guarantee for savings held by its banks, covering up to $575bn in liabilities.

France, which had joined Belgium and Luxembourg in offering the lifeline to Dexia, which has run up huge losses in its US operations, said it would come to the aid of savers with new bank measures by the end of the week.

EUOBSERVER / BRUSSELS - Despite Benelux governments announcing a partial nationalisation of Fortis Bank on Sunday, the ongoing financial crisis continued to collect scalps through Europe on Monday (29 September), with the UK and Germany intervening to save financial institutions. Meanwhile, the European Central Bank has announced it would lend eurozone banks €120 billion in "a special term refinancing operation."

The European Central Bank announced it would lend eurozone banks €120 billion in "a special term refinancing operation."

The decision by the Belgian, Dutch and Luxembourger governments to purchase half the Belgo-Dutch banking giant for €11.2 billion represents the biggest bailout of a European bank since the beginning of the crisis.

The European Commission said on Monday it had been consulted during the negotiations and had so far no reason to believe the deal was in breach of EU competition rules.

"Up until now the national authorities in Belgium, the Netherlands and Luxembourg have been listening to what the commission has been saying, so we have no reason to think that what they are going to notify the commission of is not going to be acceptable to the commission in terms of state aid rules," Jonathan Todd, a spokesperson for the institution told a press briefing in Brussels.

LONDON: This past spring, Mervyn King, the governor of the Bank of England, gave a speech denouncing the hubris of bankers. That very same day, the British bank Barclays disclosed a £18.5 million pay reward to its president, Robert Diamond Jr., for 2007 - despite sustaining a £1.6 billion write-down that year.

King followed up his criticism of the excesses of the City of London, as the financial district is known, by choosing not to accept an increase in his salary of £290,000, or $516,000.

Diamond, by comparison, is the American-born chief of Barclay's asset management and investment banking businesses, whose outsize personality and bonuses have made him one of the most visible symbols of a Wall Street ethos that has taken root in the financial district.

Stark as the contrast might have been, it was a mere hint of the uproar, led by Prime Minister Gordon Brown of Britain and joined by union leaders and theologians, that has emerged here in recent days over how to best curb a perceived culture of escalating pay packages that propelled bankers to push for exorbitant risks.

By Gavin Finch and David Yong
     Sept. 30 (Bloomberg) -- The cost of borrowing in dollars overnight surged the most on record after the U.S. Congress rejected a $700 billion bank rescue plan, heightening concern more institutions will fail.
     The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers'
Association said. The euro interbank offered rate, or Euribor, for one-month loans climbed to record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record. Rates in Asia also rose.
     ``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''     Credit markets have seized up, tipping banks toward insolvency and forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world's biggest lender to local governments, and Wachovia Corp. Money- market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. Banks borrowed dollars from the ECB at almost six times the Fed's benchmark interest rate today.

                           Libor-OIS Spread

     The Libor-OIS spread, the difference between the three- month dollar rate and the overnight indexed swap rate, widened to 246 basis points, showing cash scarcity is at a record.
     The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 338 basis points today after breaching 350 basis points for the first time yesterday. The spread was at 110 basis points a month ago.
     ``We can be sure that funding pressures are not going to ease while there is so much uncertainty,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. ``Cash is going to be at a premium. There's really no end in sight.''

Iceland has just bailed out Glitnir Bank, with the government putting in 600 million euros -- $859 million -- in return for a 75% stake.

... So this was, per capita, the equivalent of an $850 billion bailout here.

Notice, by the way, that it was an equity injection rather than a purchase of bad debt; I approve.

Investors in gold are demanding "unprecedented" amounts of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen.

Industry executives and bankers at the London Bullion Market Association annual meeting said the extent of the move into physical gold was unseen and driven by the very rich.

"There is an enormous pick-up in investment demand. I have never seen a market like this in my 33-year career," said Jeremy Charles, chairman of the LBMA. "The gold refineries cannot produce enough bars."

The move comes as fears grow among investors over the losses at investment vehicles previously considered almost risk-free, such as money funds.

Philip Clewes-Garner, associate director of precious metals at HSBC, added that investors were not flying into gold simply because they saw it as a haven amid Wall Street's woes. "It is a flight into gold because it is a physical asset," he said