New worry in Europe over credit crisis
By Mark Landler and Julia Werdigier
Friday, November 23, 2007
FRANKFURT: Europe is hardly a dominant player in writing insurance guarantees for issuers of debt - a mostly American business that makes it easier for municipal governments, schools, banks, and even professional sports clubs to sell highly rated bonds.
Yet the announcement Thursday by two major French banks that they would buy out a bond insurer owned by a Paris-based subsidiary underscored the extent to which the American mortgage crisis continued to infect Europe's financial system in new and unexpected places.
The decision by Groupe Banque Populaire and Groupe Caisse d'Épargne to pay $1.5 billion to take ownership of the insurer, CIFG Holding, from the investment bank Natixis was designed to preserve CIFG's AAA credit rating, which is considered vital to its ability to do business.
Like other insurers, most of which are based in the United States or are American-owned, CIFG was at risk because ratings agencies questioned whether it could guarantee deteriorating mortgage loans.
In the short term, analysts said, the intervention by the French banks soothed the market, because it shored up CIFG's creditworthiness. In a statement Friday, Moody's Investor Service said it was unlikely to reduce CIFG's rating, a day after Fitch Ratings gave a similar assurance.
But the stream of jolting announcements - involving a range of companies from specialized players like CIFG to household names like Swiss Reinsurance - is stoking fears that Europe has yet to suffer the worst of the credit crisis.
"It has the potential, if it lasts, to influence other segments of the markets," Axel Weber, the president of the Bundesbank, the German central bank, said at a banking conference in Frankfurt.
Weber said he was troubled that insurers, also known as monolines, were now under pressure. In such a climate, he said, markets were not likely to settle down until next year, when the banks provide a full accounting of their write-downs in their annual financial statements.
Part of the problem is that Europe keeps getting hit in unlikely places. Only one other European bank, Dexia of Belgium, even owns a major bond insurer. The biggest names in the business, MBIA, Ambac Financial Group, and FGIC, are based in and around New York.
Until this week, involvement by Europe in bond insurance had been of interest only to insiders. In that sense, the CIFG bailout recalls the rescue last summer of two little-known German banks, IKB Deutsche Industriebank and Sachsen, which had suffered heavy mortgage-related losses.
Julian Chillingworth, a fund manager at Rathbone in London, said that because Europe's mortgage-related exposure was not as broad in that in the United States, "it's not so obvious where you might find the risk."
Analysts continue to believe that in Europe, the less well-known or sophisticated institutions are most at risk of exposure to troubled assets. While big names like UBS of Switzerland and Deutsche Bank have reported multi-billion-dollar write-downs, the damage - and resulting management upheaval - was less severe than that at Citigroup or Merrill Lynch.
But Europeans were rattled this week by news that Swiss Re, the world's biggest reinsurance company, had written down $1.07 billion in the value of derivatives backed by mortgage securities.
Two weeks earlier, Swiss Re had reassured investors that its exposure to problems in the American subprime market was limited. The company reported third-quarter results earlier this month that suggested it had emerged from the credit crisis reasonably unscathed.
"Swiss Re, coming out after its results to say it had found more problems, really hurt credibility," said John Raymond, an analyst at CreditSights, a research firm in London. "People thought the third quarter would clear up the mess. That's why the credit markets are responding so horribly."
While shares of UBS rose after its disclosure of $3.4 billion in write-downs in early October, reflecting relief that bank was getting a grip on its problems, Swiss Re's stock was hammered by its announcement.
Now analysts expect another wave of write-downs from banks to reflect the further decline in the value of mortgage-backed securities since they closed their books at the end of October.
"Maybe we will double what we have seen until now," said Keith Bowman, an equity analyst at Hargreaves Lansdown in London. "The difficult bit is, how much, and has the market priced it in already?"
For Dexia and Natixis, the bond insurance business was attractive for much the same reasons that European banks invested in exotic asset-backed securities: the promise of new markets with high returns.
A spokeswoman for Natixis, Corinne Lavaud, said that the bank's French owners created CIFG in 2001 to diversify its offering to investors and acquire expertise in new fields of finance."
Natixis is scheduled to report third-quarter earnings Sunday, and analysts at KBW in London expect it to report a write-down of €591 million, or $874 million, largely because of CIFG.
As of Oct. 5, the insurer said it had direct exposure to $1.9 billion of residential mortgages. By buying CIFG from Natixis, in which they each own a 34 percent stake, Groupe Banque Populaire and Groupe Caisse d'Épargne are injecting $1.5 billion of capital into the insurer.
When Dexia bought its insurer, Financial Security Assurance Holdings, for $2.6 billion in 2000, it said, "In one step, we have dramatically enhanced our position in the U.S. municipal finance market." Last week, Dexia reported a 28 percent decline in its third-quarter profits because of losses at FSA.
At the conference in Frankfurt, the chief executive of Deutsche Bank, Josef Ackermann, lamented the market's lack of confidence, which he said generated daily rumors about the next bank or fund in trouble.
Noting that the crisis had originated in the United States, Ackermann said the organizers had invited a representative of the Federal Reserve to appear on a panel with Weber of the Bundesbank and Callum McCarthy, chairman of the FSA, Britain's banking supervisor.
Because of the Thanksgiving holiday, he said, nobody volunteered to travel to Frankfurt. "I think it is important to spend time with family," Ackermann said, to titters from the audience of European bankers.
Julia Werdigier reported from London
Enviado: 25/11/2007 15:08