Fortis rescue needs more than half measures

By Arnoud Boot

Government intervention in Fortis was inevitable and should have come much earlier says Arnoud Boot, professor of financial markets at Amsterdam University.

The government intervention in Belgian Dutch financial services group Fortis came too late. The company has been facing problems for months – and the crucial difference between a financial institution and an ordinary company is that a bank cannot be given time. It deals in liquidity and can easily slip through your fingers. If this is the case, you need to come down hard. Half measures are not enough.

There were two options: intervene by injecting capital and taking complete control of the bank. Or, what is almost always better, let the bank be taken over straight away by a stronger player.

The half-hearted solution put together last weekend might have secured the Netherlands' interests in Fortis, but it has damaged the Fortis Group in Brussels. But national sensitivities in Belgium made tough moves there impossible.

Capital injection

A capital injection from the government is not enough for Fortis because the lack of action over the past few months has led to lack of trust in the bank and particularly in its management.

One manager was swapped for another on Friday and the word is that further changes are on the cards. This is all so vague and impossible to follow that confidence is far from being restored. Concrete action is the only thing that counts.

A few months ago there was more room to manoeuvre but at that time there was not enough recognition that confidence was eroding. Immediate action would have helped then, but by last weekend, it had become irrelevant.

Verge of collapse

What was apparent was that Fortis' business activities were on the verge of collapse. Every company which was still doing business with the bank and had money in it - and as such was running a risk - had to explain itself, so everyone was running for the exit. Last week the Belgian government focussed on protecting savers, but it was the business activities where confidence was eroding.

Confidence remains a problem and Fortis risks being dismantled by the market. A takeover would have stopped this. So if Dutch finance minister Wouter Bos says that BNP Paribas offered very little for Fortis, this is only half the story.

What is more important: retaining Fortis' real functions and jobs? Or the interests of shareholders? The reality is that the half-and-half solution selected means that both sides will be worse off.

Unclear logic

On the Belgian market, Fortis can perhaps continue as a marginalised local player.

And in the Netherlands? The Netherlands has voted to give a sort of solidarity levy of four billion euros to Fortis Bank Nederland, which does not include ABN Amro.

Hopefully this will work, but the logic is not completely clear. Perhaps it is a political compromise.

Compromises between national governments have to compete with increasingly elusive financial institutions which operate far beyond their borders. Bos now has the impossible task of making sure that the money in Fortis Bank Nederland does not disappear in the direction of Brussels.

Cool head

There is one light on the horizon. The damage to ABN Amro has been limited. Fortis is now being forced to sell ABN Amro. Bos and Dutch central bank president Nout Wellink have kept a cool head about ABN Amro's Dutch activities.

ABN Amro could not be integrated into Fortis and that has worked out well. It is also extremely sensible to allow the sale of ABN Amro to proceed in an orderly fashion and not to have forced it through last weekend. Speed is, however, of the essence. A too-long period of uncertainty will not benefit ABN Amro.

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