Britannia Radio

rom Times Online

January 29, 2009

Global banks join clamour for bailouts

Jenny Booth

The crisis facing banks was sharply underlined today when Russia's second-biggest bank admitted in Davos that it was seeking a bailout and Germany indicated that it was coming round to the idea of "bad banks" to hive off toxic debt.

Russian banks have been badly hit by the global economic crisis, which has hammered the country’s stock, bond and currency markets. A number of its smaller banks have already failed, and some of its biggest lenders may need capital injections.

Speaking at the World Economic Forum in Switzerland, Andrei Kostin, the chief executive of VTB, Russia's second-largest bank, said that the lender may issue preference shares this year as part of a 200 billion rouble (£4 billion, $5.7 billion) state recapitalisation.

“There is no final decision yet on the size of the capitalisation,” Mr Kostin said. “We think that 200 billion roubles would be the right decision.

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"The capitalisation is linked to an additional share issue which takes about half a year in Russia, so we think the decision should be taken now. There are different options, including the issue of preference shares.”

Mr Kostin said he hoped VTB could break-even for 2008 under international accounting, but that it was too early to forecast 2009 results. He said non-performing loans totalled about 3.8 per cent but VTB was using forecasts for bad loans for 10 per cent, for planning purposes.

“The worst scenario is up to 10 per cent,” he said.“The reason for the crisis in the Russian banking sector is quite different to in the West. In Russia, a major problem is the inability of companies to return debts.”

VTB has to pay about $7 billion in foreign debt this year and will seek to refinance some of it, he said.

“We will negotiate for refinancing but we think we will have enough liquidity for this year,” said Mr Kostin.

“Frankly speaking, this year it will be very difficult for Russian companies to find funding abroad, with the exception of major companies who have a state guarantee, or some of the oil companies.”

Several governments, including America and Britain, have been forced to step in to rescue their banks from collapse as credit markets dried up after banks began to reveal they made multibillion-dollar losses on mortgage-backed assets originating in the United States.

One of the ideas Barack Obama, the US President, is seriously considering is for the government to set up a "bad bank" where ailing institutions would be allowed to dump their bad loans and toxic assets.

The idea has gained some international interest. In Germany, Peer Steinbrueck, the finance minister, told a newspaper today that there would be no state “bad bank” set up to take banks’ toxic assets off their books, but individual banks might each consider such a remedy.

“In recognition of the effects of bad assets on a bank’s balance sheet, the question arises of whether each individual institute should not have the possibility to remove problem assets from its balance sheet and to start over again,” he said.

Yesterday George Soros, the international financier who is one of the few people still to be making money through the financial crisis, said that what was needed in America was even more radical - not so much a bad bank, as a good bank where only sound assets were invested, so that it could attract confidence.

Mr Soros said that President Obama's $825bn fiscal stimulus package and his proposals for a bad bank might ease the situation, but were only palliatives.

“They need a thorough reorganisation of the mortgage system and you have to replenish the equity of the banks,” said the Hungarian-born speculator-turned philanthropist.

“That now would require an injection of about a trillion and half dollars - much more than if they had done it previously under the TARP (the $700 billion Troubled Asset Relief Program agreed by Congress last year). The well has been poisoned by the way the TARP money was used.

"It needs a good bank/bad bank solution, but I would do it differently than what is proposed," he went on.

“I would keep the capital of the banks together with the bad assets in the bad bank, and then create a new bank with the good assets of the bank and the recapitalise that, giving the shareholders the right to put in more money. Without this the banks will not lend, because they know there is a lot of deterioration coming.”

Earlier Mr Soros told a press lunch that the “financial structure we used to take for granted has collapsed” and everyone was in a“state of shock” as the financial storm spread internationally and into the real economy.

He said the bankruptcy of Lehman Brothers investment bank last September was a “watershed event” and that the financial system was now on “artificial life support.”