Flanders steps in to save KBC
The Flemish government last week stepped in to bail out Leuven-based bank KBC with an immediate injection of â‚¬2 billion and a â‚¬1.5 billion contingency should the bank need it. The move had an immediate effect on the market, with the bankâ€™s share price jumping by almost 50% in one day.
â‚¬2 billion injection stops market slide
The bank approached Flanders Region after a week of repeated falls in the KBC share price. This threatened to produce a repeat of the banking collapse of December, when the federal government was forced to step in to save Dexia and when Fortis was broken up and part handed back to the Netherlands, while the rest was sold to Paris-based BNP Paribas.
KBC managed to ride that storm but didnâ€™t have the strength to weather a repeat. Pressure started to build when credit rating agency Moodyâ€™s said it was downgrading some structured credit instruments held by KBC in quantity. There followed rumours about the bankâ€™s solvability, which led to the offloading of shares, sending the price into a nosedive.
The bankâ€™s CEO, AndrÃ© Bergen, went to the federal government for help. But KBC is still seen as a Flemish bank, and French-speaking members of the coalition could only consider aid for KBC if there was some sort of equal aid for Walloon business.
But the Flemish government saw the chance to act. Flanders recently announced that it is now debt free and has even had the largesse to hand out money to the regionâ€™s municipalities to help ease their debt burden. While the federal government failed to act last Wednesday, Flemish minister-president Kris Peeters ordered the Flemish government services to investigate the details of a bail-out of KBC. By 20.00 that evening he had a proposal to put to his ministerial colleagues. They agreed the deal by midnight, and civil servants worked through the night to draw up the necessary papers so that a deal could be completed on Thursday morning before the stock market opened.
The package consists of two parts. KBC will receive an immediate loan of â‚¬2 billion, but the government will not take equity, unlike a previous deal at the end of last year agreed by the federal government. Instead, in years when the bank pays a dividend â€“ expected in 2010 â€“ the government will receive interest of 8.5%. The â‚¬2 billion will be used to strengthen the bankâ€™s capital reserves. The government imposed only one condition: KBC must continue to make a priority of extending credit to small businesses in Flanders, making it possible, at least in some cases, for them to expand out of recession. KBC has the option to repay the loan at any time, at interest of 150%.
The hope is that the capital injection will be enough to calm the markets and stop the share price from falling further. If it is not sufficient, however, the government is holding another â‚¬1.5 billion in reserve to step in again.
The immediate results suggest that wonâ€™t be necessary. KBC took some steps of its own to steady the markets by writing off some risky investments known as collateralised debt obligations, or CDOs. Bergen also announced some cost-cutting measures, including the loss of 600 jobs in KBCâ€™s operations in the Czech Republic. In one day, the share price gained 50% of its previous dayâ€™s low of â‚¬6.09, to close at 11.24 â€“ only half of its value the week before, but a corner had been turned.
â€œWe took a conservative stance when marking down to zero all CDO investments which have not the highest, so-called super senior status,â€ Bergen said. â€œMeanwhile, we have taken decisive measures to reduce costs and to further reduce the risk profile of the activity portfolio.â€
BANKING NEWS IN FIGURES
loan from the Flemish government to KBC to increase capital reserves
8.5% = â‚¬170 million
annual interest to be paid as a coupon in years when a dividend is paid to shareholders
amount that would be paid back if KBC decides to repay the loan
contingency reserve to be maintained in case a further capital reinforcement is needed
1% = â‚¬15 million
interest paid on the contingency reserve so long as it remains open
total forecast losses for Fortis for 2008
portion of the whole attributable to the disastrous ABN Amro takeover
â‚¬5.5 to â‚¬6 billion
increase in government debt as a result of the sale of Fortis to BNP Paribas, according to Lijst Dedecker deputy Jean-Marie Dedecker, speaking in parliament
Flanders announces second relaunch plan for businesses
â‚¬91 million to ease credit crunch
Flanders will invest a further â‚¬91 million in the local economy, in what the region calls its second relaunch plan, economy minister Patricia Ceysens said last week.
The first relaunch plan, announced in November last year, allowed for â‚¬800 million in investment funding to cushion the shock of the growing economic crisis. â€œOur first plan in November isnâ€™t going to be enough. We need a second wind,â€ said Ceysens.
One main aim of the package was to provide funding for businesses wishing to expand. Banksâ€™ increasingly reluctance to offer risk capital should have been countered by the availability of government funding, but in practice the difficulty for businesses remains, Ceysens said.
Last week the national organisation that oversees the financial sector, Febelfin, released figures showing that credit availability had risen in the fourth quarter of 2008 in comparison to the same period the year before, and also over the third quarter. In fact, Febelfin said, credits agreed for businesses had even risen in the difficult last month of December, even as the banking sector seemed to lie in ruins.
In December 2007, according to Febelfin, â‚¬97 billion in credits were taken up by businesses. By December 2008, that figure had risen to â‚¬108 billion â€“ an increase of 11%. â€œUnlike in other European countries, the financial institutions in Belgium have kept the credit supply open,â€ the report begins.
Ceysens is not convinced. â€œFebelfin maintains that provision of credit is increasing,â€ she said. â€œBut in the meantime we are receiving a number of signals that companies are finding it tough.â€
The governmentâ€™s new plan, as well as the â‚¬91 million in investment funding, will also provide some measures to make it easier to get credit. The governmentâ€™s guarantee scheme, by which the region stands guarantor for certain types of business investment, will be extended to include larger companies. And the maximum sum that the region will guarantee will be increased from â‚¬1.5 million to â‚¬3.75 million.
The â‚¬91 million will be split up as follows: â‚¬50 million for the so-called Mezzanine loans to businesses, designed to help financial restructuring; â‚¬25 million for the Flemish Innovation Fund, which provides risk capital for investment in innovative projects; the remainder to the regionâ€™s â€œparticipation agencyâ€, which will itself lend money to companies.
In addition, and unconnected to the current round of funding, Ceysens intends to organise a new round of public funding for the Archimedes Fund, which supports small and medium-sized businesses. At the last round in 2005, the public invested â‚¬110 million, and the Flemish government matched that sum. â€œBy next year those resources will be used up,â€ Ceysens said. â€œIâ€™m convinced we can raise a reasonable amount. Investors are more likely these days to trust products where the government is involved than the banking sector.â€