Europe Struggles With Fallout From Lehman Failure | Business| Economy and finance news from a German perspective | DW | 15.09.2008
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Europe Struggles With Fallout From Lehman Failure

European and Asian share markets were badly shaken, as market indicators tumbled on the news that US investment bank Lehman Brothers would declare bankruptcy. Europe's major central banks pledged their support.

Lehman Brothers building facade in New York

The US drew the line on helping Lehman, which is filing for bankruptcy

Europe's major central banks are moving to calm volatile markets by providing more cash to money-starved banks in the wake of Lehman Brothers Holdings' decision to seek bankruptcy protection.

In early trading on Monday, Sept. 15, share markets across Europe -- including the German DAX, Paris Bourse and London Stock Exchange -- plummeted in response to snowballing problems in the US financial sector.

Banking shares were hardest hit on news that Wall Street investment giant Lehman Brothers would declare Chapter 11 bankruptcy and that financial-services behemoth Merrill Lynch agreed to be taken over by Bank of America.

German ties to Lehman called "manageable"

Yet traders in Frankfurt said there was no panic on German markets. Investors understood that the US government could not step in to bail out every bank that had overreached itself in mortgage market speculation, they said.

Portrait Lehman CEO Richard Fuld, Jr.

Lehman CEO Richard Fuld tried hard to save his firm

Furthermore, in a bid to calm markets, the German Finance Ministry said Monday that the link between the nation's banks and the collapsed Lehman are "manageable and can be dealt with."

It added that it was in close contact with its international partners.

"The ties of German banks to Lehman Brothers Holding, which has filed for bankruptcy protection, are in a manageable range and can be dealt with," the ministry said in a joint statement with the BaFin marker regulator and the central Bundesbank.

The three are in close contact with the country's banks as well as with international partners and "are watching very closely further developments on national and international markets," the statement said.

ECB moves to reassure markets

Lehman Brothers announced it was filing for bankruptcy early Monday, prompting the US Federal Reserve and major global banks to shore up financial markets.

A stock trader phones in front of the indicator panel at the German stock index DAX

The US bank crisis has had DAX traders scrambling

In a brief statement on Monday, the European Central Bank -- the central bank for the 15 countries that use the euro -- said it was watching money market conditions closely in the eurozone, after the US Federal Reserve said Sunday, Sept. 14, that it was taking measures to stabilize conditions on financial markets, including accepting a wider range of financial instruments as collateral.

"The ECB continues to closely monitor the conditions in the euro-area money market. The ECB stands ready to contribute to orderly conditions in the euro money market."

The Frankfurt-based ECB is calling for bids in one-day quick tender at a minimum rate of 4.25 percent.

The Bank of England in London says it is offering up to 5 billion pounds (nearly $9 billion, or 6.4 billion euros) in a three-day auction while the Zurich-based Swiss National Bank says it is also providing liquidity at an overnight rate of 1.9 percent.

European Central Bank headquarters in Frankfurt

ECB will help keep "orderly conditions" on the market

Frantic negotiations throughout the weekend failed to produce a buyer for the venerable Lehman Brothers, leading to the bankruptcy plans.

Merrill Lynch takeover

Furthermore, in a deal announced late Sunday, Merrill Lynch & Co, a stock brokerage and investment bank, agreed to be bought out by Bank of America Corp for $50 billion in stock.

The Lehman collapse follows more than a year of turmoil arising from the collapse of the US housing bubble and a high rate of mortgage defaults, which undermined Wall Street's market for mortgage-backed securities.

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