In Europe. And you thought we had it bad in America.

The Dutch-Belgian bank Fortis, Britain's Bradford and Bingley, and Iceland's Glitnir, were all partially or fully nationalized after failing to roll-over debts in the short-term money markets, while the French state pledged support for the Franco-Belgian lender Dexia after the share price collapsed on reports of a capital shortage.

"The European financial sector is on trial: we have to support our banks." said French President Nicolas Sarkozy. He has reportedly ordered the state investment arm Caisse Des Depots to shore up Dexia, even though the bank is based in Belgium.

Germany's Hypo Real Estate, a commercial property lender, was rescued with a €35bn lifeline from a consortium of local banks. The lender has $560bn in liabilities, almost as much as Lehman Brothers.

Mortgage lenders were warned by the City watchdog on Tuesday to batten down the hatches and brace for "very difficult" market conditions next year as at least 1.4m homeowners face a sharp jump in loan repayments.

The Financial Services Authority said that there was "a very real prospect that conditions will worsen further into next year, in terms of both liquidity and credit risks".

The bleak warning from the FSA comes as pressure builds on the Bank of England to cut interest rates as it prepares to meets for its monthly meeting.

Fresh evidence from Halifax, the country's biggest mortgage lender, showed that the rate of the slowdown in the housing market is quickening. Last month prices fell by 1.1 per cent twice the rate of the previous month. The annual rate of growth fell to 6.3 per cent.

Halifax said the drop was the biggest monthly fall since last December and the first time it had recorded three months of consecutive falls since 1995.

The dollar mounted an explosive rally in the third quarter, persuading some investors that its long decline had finally touched bottom.

By late September, however, as markets grappled with the immensity of the U.S. financial crisis, the buck was back under pressure. It managed to finish the quarter on a high note, surging 2.6% against the euro Tuesday from a day earlier amid signs of turmoil in European banks.

Over the course of the quarter, the dollar strengthened 11.8% versus the euro, rallied 12% against the British pound and was little changed versus the Japanese yen. It was the dollar's best quarter against the euro since the European currency's inception in 1999 and the best against the pound in at least a decade.

Measured against a broad range of currencies in a Federal Reserve index, the dollar gained about 5% from the end of June through Monday, putting it back at levels that prevailed a year ago.

Still, problems may lie ahead. The size of the U.S. government's proposed bailout package and the numerous interventions by the U.S. Federal Reserve could hurt the dollar in the months and years to come.

So how bad is the mortgage crisis in Europe? Pretty bad.

The weekend's events have highlighted European fragility in the financial crisis, note Citigroup analysts. In the UK, the eighth biggest mortgage lender (in terms of mortgage lending in 2007) has been nationalised. In all, four of the top 10 mortgage lenders have now been nationalised or required an emergency rescue since mid-07.
A major Benelux bank has required a public sector bailout, with the governments of Belgium, the Netherlands and Luxembourg jointly taking a 49% stake.
In Germany, the German government and a consortium of banks provided EUR35 bln to a large German Bank that is specialized on real estate and government funding.
In Denmark, trading in the shares of a small bank was stopped on Friday after the failure of one of the bank's large customers, a property speculator, and the bank was sold over the weekend. In total, six minor Danish banks have now been sold/merged or bailed out by the state so far in recent months.

European house value erosion
Although each of these cases has particular features, they are not isolated events. Rather, they are symptoms of Europe's major vulnerabilities to the credit crunch, note Citigroup analysts. These vulnerabilities stem from the large rise in corporate and household debt in recent years, international linkages, and the banking sector's relatively low overall cushion of capital and underlying profitability.

Although the overall European housing boom has been smaller than that in the US, the surges in house prices in some countries - notably the UK, Spain, Ireland and France - have all exceeded the US so far this decade. In turn, house prices are now flat or falling across most European countries, with adverse economic and financial effects. The drop in house prices is causing weakness in housebuilding (especially in Ireland, France and Spain), adverse wealth effects on consumers (especially in the UK, Spain and Ireland) and widespread erosion of the value of mortgage collateral on lenders' balance sheets. But, whereas the US housing adjustment has been underway for over two years, the European housing adjustment has only started last year. Most of the decline in European house prices probably still lies ahead.

So where am I on this? I have instructed my Congressman, Don Manzullo, to vote no on the bail out unless the Community Reinvestment Act which is at the core of the American mess gets fixed.

Cross Posted at Power and Control