Banking crisis spreads to Europe

European banks are being propped up all over the continent. And with sizeable exposure to likely losses in the US - as well as high credit-growth countries in eastern Europe - there is plenty of scope for more misery.

"It seems like the world is going under," said Mattias Westman of Prosperity Capital Management. America's S&P 500 index fell by 8.8% on Monday after Congress unexpectedly rejected the $700bn bail-out plan for US banks. Money markets remained gummed up early this week, threatening the supply of credit to economies even as central banks pumped yet more liquidity into the system. The interbank wholesale money market is not working, says Padhraic Garvey of ING bank. Three-month interbank loans in Europe climbed to a record as the banking crisis spread to the eurozone.

The pan-European DJ Stoxx 600 index plunged to January 2005 levels: not long after European politicians suggested there was no need for a Paulson-style bail-out in Europe, they are rushing around propping up banks across the continent. The governments of Belgium, Luxembourg and the Netherlands agreed an €11.2bn bail-out of banking and insurance group Fortis, one of the largest retail banks across the three countries, and took a 49% stake in the subsidiaries in their country. The shares had slumped amid losses on mortgage-backed securities and the acquisition of part of ABN Amro, which had stretched its balance sheet.

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