US bank crisis smashes hole in European markets

Shares in Spain, Italy, the Netherlands, Austria, Greece, Poland, Romania, the Czech republic, Slovenia and Lithuania also fell by 3.5 percent or more, with only Sweden, Finland and Estonia emerging relatively unscathed.

Individual European companies took severe hits with the British HBOS banking group losing half its value, Barclays bank losing 10 percent and Sweden's SEB bank losing over 8 percent.

The reaction came in response to news that two of the biggest US investment banks, Lehman Brothers and Merril Lynch, are to vanish following huge losses in the current financial downturn.

Lehman Brothers confirmed it was filing for bankruptcy at 06.31 Brussels time on Monday morning. The Bank of America said it would buy the ailing Merril Lynch just six minutes later.

Within a few hours of the announcements, the 4,000 or so Lehman Brothers staff at the company's building in London's Canary Wharf began carrying out their personal possessions in cardboard boxes.

The European Central Bank (ECB) tried to reassure investors by lending €30 billion at a fixed rate, while the Bank of England lent £5 billion (€6 billion).

European banks had asked for €90 billion in loans, however, with the ECB indicating more funds may be mobilised soon. "[The ECB] is ready to contribute to orderly conditions in the euro money market" its statement said.

A European Commission spokesman said Brussels remains "confident of good co-ordination, as well as a solution, among central banks, regulators and the private sector."

The situation saw finance ministers in France and Denmark reach out to ordinary bank customers, with Copenhagen saying it would guarantee personal savings of up to €50,000 in the event of a bank's collapse.

'No panic'

"All the monetary, banking and treasury authorities have been consulting for several days [as the US crisis unfolded]," French finance minister Christine Lagarde said on Europe 1 radio. "We worked again last night and the mechanisms are in place, the central banks are on alert, there is no panic."

Over the weekend, EU finance ministers meeting in France worked out a modest plan to help stave off a US-type scenario in Europe by agreeing to harmonise the way banks report their financial results by 2012.

But EU states were divided on how to tackle international banking supervision, with Finland, Spain and the Benelux countries keen for banks' host countries to play a greater role but with the UK, Germany and France opposed, Finnish daily Helsingin Sanomat reports.

"Things are going to get worse before they get better," Marc Ostwald, a strategist at UK-based broker Monument Securities told The Daily Telegraph, echoing widespread sentiment in the private sector.