Belgium bites the bullet

In Bruges, a black comedy film starring Colin Farrell and Ralph Fiennes, has helped put Belgium on the map.

But there is a bigger "shoot em up” event happening in Belgium at the moment that is likely to be remembered long after In Bruges and its enigmatic dwarf are forgotten.

It involves the near collapse of one of the country's oldest financial institutions, Fortis, which has spent the past two weeks denying it is in strife. Those denials have failed to restore confidence in the banking and insurance giant, which has total assets of €974 billion.

The Belgian and Dutch governments have come to the conclusion that Fortis is too big to fail. They stepped in today to come up with a rescue package that is likely to involve a government guarantee of deposits.

Fortis is a banking and insurance giant that allowed its growth ambitions to cloud its understanding of its capacity to expand. The killer blow was the decision to join a consortium in 2007 to fund the €71 billion takeover of ABN Amro. Other members of the consortium were Banco Santander and Royal Bank of Scotland.

Ever since then Fortis has been under pressure to strengthen its capital.

The capital is needed to boost its solvency in the face of impending large capital losses of about €900 million from the divestment of various assets including its share of ABN. Some divestments were forced on Fortis by the EU competition regulator because of concentration in the Dutch banking market.

The latest interim results for Fortis showed profit down 41 per cent to €1.6 billion with the bank net profit down 41 per cent and the insurance division net profit down 16 per cent. It was not a bad result in the context of the turmoil in global markets.

The impact of the credit market turmoil was a relatively modest €591 million. But it was the looming losses from the ABN deal that worried markets.

Fortis holds its investment in ABN through RFS Holdings. Fortis has admitted it will have to write down this investment by the end of the year but it is unclear by how much.

The bank has been subject to persistent rumours about its financial health over the past few months. Instead of confronting these rumours and biting the bullet on the need for more capital, Fortis management took a head in the sand approach.

Confidence in the bank began to evaporate this month amid escalating rumours about the institution's solvency. Fortis issued a statement on September 16 that emails claiming it was about to do a rights issue were wrong. On September 25 it issued a statement denying current rumours in the market without naming them.

These statements have been against a background of a plunging share price. The stock has fallen 50 per cent this month.

On Friday Fortis issued a last ditch statement aimed at plugging a hole in the dike. A further collapse in its share price was bound to flow over into community confidence in its ability to stand behind its deposits.

Fortis reminded the market on Friday that it had €300 billion in deposits and that since January this year it had only lost about 3 per cent of its deposits. Most importantly, Fortis said it had €4 billion in excess capital.

In a concession to market concerns about the ABN Amro deal, Fortis said it would step up its asset disposal program by €5 billion to €10 billion. As well, it said that "no capital increase is being envisaged”.

Within hours of that announcement the interim chief executive Herman Verwilst was replaced with Filip Dierckx.

And within 48 hours of that announcement there is now talk of a €5 billion capital raising to strengthen the bancassurance group's capital base.

Fortis operates in Australia through Fortis Merchant Banking, which has an office in Sydney. It offers clearing, custody, securities lending and various other custodian services.

Fortis also owns Fortis Investment Management Australia, which has $6 billion in assets under management. The company issued a statement today reiterating that all funds were held separately to the Fortis group balance sheet and that no client assets were at risk.

Institutions in Australia dealing with Fortis will probably know by the end of the day whether they face any counter-party risk from the problems besetting the parent. Most likely they will now be dealing with a pseudo sovereign risk rather than a private bank.