Euro Zone: The Qatari royal family's investment in two Belgian-Luxembourg banks has reawakened hopes in Europe of a much-needed injection of capital in the banking system from private sources.
Europe looks to Gulf for bank help
Amsterdam // The Qatari royal family's investment in two Belgian-Luxembourg banks last week has reawakened hopes in Europe of a much-needed injection of capital in the banking system from private sources in the Gulf and from wealth funds.
But analysts warn that even these investors will not be able to rescue the continent's floundering financial sector without reforms and concerted international action.
The renewed interest in attracting sovereign wealth funds and billionaires from the Gulf, Singapore and China comes as European leaders struggle to get a grip on the deepening financial crisis.
World markets are holding their breath ahead of a summit in Brussels on Sunday where Europe is expected to come up with a more effective bailout for the debt-stricken Greek economy and a more comprehensive assurance plan for the 17-nation euro zone.
The US$440 billion (Dh1.61 trillion) European Financial Stability Facility, it is now widely accepted, falls far short of what is required. The need to recapitalise Europe's banks, to safeguard them from bad loans to such countries as Greece and others, is more urgent than ever, and it is on this basis that some Europeans are casting hopeful glances towards the Gulf.
"There is a need for equity investment in the European market. Any source of equity investment is most welcome from an economic point of view right now in the European banking system," said Nicolas Véron of Breugel, an economics and finance think tank in Brussels.
Luxembourg announced that Precision Capital, backed by Qatar's Al Thani royal family, had bought the investment bank KBL for €1.05bn (Dh5.36bn). Luxembourg's finance minister, Luc Frieden, also said that the same group had agreed to buy Dexia BIL, the Luxembourg private banking operation of the restructured Franco-Belgian bank Dexia. The Qatari royal family's investments are separate from those of the country's official sovereign wealth fund, Qatar Holding.
Foreign investors are wary of any major commitment to Europe at a time when asset values and the euro are weak.
But large wealth funds will not be able to offer the European banking system all the relief it needs, warned Rachel Ziemba, a director at Roubini Global Economics in London.
"The scale of the capital that is required in the European financial system at large is greater than even they would be willing [to] or could provide," she said.
The problems with Europe's banking system are structural, Ms Ziemba said, and they will have to be addressed that way, through the establishment of new Europe-wide institutions and the intervention of the IMF and others.
Also, there is a reluctance on the part of some Europeans as well as the wealth funds themselves to take on too much of a burden.
"From a political and a regulatory standpoint, the European authorities would be quite happy for small stakes to be taken by sovereign wealth funds and foreign governments. They would probably not be very comfortable with large strategic stakes. And I'm not sure that even some of these sovereign wealth funds want to get into the business of actually managing banks," said Ms Ziemba.
The question of expertise has come up after some of the funds were burnt in earlier rounds of investment, particularly during the 2007-09 period, when the financial crisis started to unfold.
One particular case is that of Libya's investment in the Belgian bank Fortis in 2008, just before its shares plunged. And the Abu Dhabi Investment Authority sovereign wealth fund encountered problems with its 2007 investment in Citigroup in the US. But the knowledge on the part of the wealth funds has improved, said Mr Véron. "This investment is not going to threaten their general balance if it goes wrong, but I think now the sovereign investors more than in 2007 and 2008 are very careful to also have a good rate of return on all their investments," he said.
Qatar has been particularly visible this time, said Ms Ziemba. She noted that the Gulf state, like many others, had a vested interest in the stability of the European banking system.
In 2008, Qatar invested billions in the global banks Credit Suisse and in Barclays. During the current financial crunch, Qatar has invested in the Greece's Alpha Bank and has taken a share in European Goldfields, supporting gold mining operations in Greece.
But Europe should not look at Qatar and others as a "white knight" riding to the rescue, said Ms Ziemba. "This is not an altruistic gesture. This is an investment when Qatar and others are seeing an economic opportunity and are seeing a price they like at a time when they have capital. And obviously Qatar and many others have an interest in the stability of the global financial system."