Dexia gets bailout, Europe tries to calm bank fears

LONDON (Reuters) - Belgium and France stepped in to help Dexia with a capital injection and Ireland pledged upto 400 billion euros to guarantee bank deposits as the rejection of a $700 billion U.S. rescue plan sent shockwaves through financial markets on Tuesday.

Top politicians and bankers met to calm fears among investors and reassure customers that savings were safe, offering some relief after days of frenzied activity.

After all-night negotiations Belgian, French and Luxembourg governments and shareholders pledged 6.4 billion euros ($9.2 billion) for Dexia DEXI.BR to boost its capital and attempt to restore confidence.

A part-nationalization of its Benelux rival Fortis FOR.BR on Monday lined it up as potentially the next bank in trouble.

“The domino effect of bank failures has started and is now spreading to Europe, just look at Fortis and Dexia,” said Sebastien Barthelemi, analyst at Louis Capital Markets in Paris.

“For a long time, we feared the systemic risks, now we’re watching the dominos collapse one after another. It’s scary,” he said.

Europe’s banks were shaken after U.S. lawmakers rejected a bailout plan late on Monday, which sent U.S. and Asian stock markets skidding.

Customers visit a Dexia bank in Brussels September 30, 2008. REUTERS/Yves Herman

“The failure of the U.S. Congress to approve the Paulson plan was not in the script,” said Gerard Lyons, chief economist at Standard Chartered. “A deep and long U.S. recession should not be ruled out.”

By 6:15 a.m. EDT the DJ Stoxx European bank index .SX7P was down 0.3 percent, stabilizing after an early drop of more than 3 percent and Monday's 8 percent slump, helped by hopes the U.S. rescue plan can be revived.

The biggest fallers included Royal Bank of Scotland RBS.L, Deutsche Bank DBKGn.DE and BNP Paribas BNPP.PA, each down over 3 percent.

Britain's HBOS HBOS.L fell 12 percent as fears lingered that its takeover by Lloyds TSB LLOY.L, brokered by the government earlier this month, may run into trouble, analysts said.

Dexia shares bucked the trend and jumped 13 percent after its capital boost.

Irish banks also surged after the Irish government announced it will guarantee all bank deposits for two years.

Irish banks have been hit hard by the double whammy of the credit crisis and a property slump, and Allied Irish Bank ALBK.I shares rallied 19 percent on the news.


France also rushed to reassure savers their money was safe.

“There is no reason to be frightened and to give in to panic,” European Central Bank council member Christian Noyer said on RTL radio, following talks with President Nicolas Sarkozy.

Sarkozy is due to meet the heads of the main French banks and has arranged a meeting in Paris this week with Britain, Germany, Italy, Luxembourg and ECB President Jean-Claude Trichet to discuss Europe’s response to the crisis.

British Prime Minister Gordon Brown met Bank of England Governor Mervyn King to discuss the crisis, a day after nationalizing Bradford & Bingley BB.L.

Governments in Germany and Iceland have also stepped in to rescue banks this week, following on the heels of a series of U.S. bank bailouts in recent weeks as a deepening credit crisis threatens to tip the broader economy into recession.

The cost of insuring banks against default also rose, but the move was modest by comparison with the dire warnings of analysts of the risks if the U.S. bailout plan fails.

Additional reporting by Blaise Robinson in Paris; Philip Blenkinsop in Brussels; Myles Neligan and Jane Baird in London; Editing by David Cowell