LONDON, Jan 21 (Reuters) - Britain conceded on Monday it would be financially entangled with stricken lender Northern Rock for years, in the wake of the credit crisis, while German lenders and the Bank of China faced fresh losses.
As global shares plunged on fears of a U.S. recession following its subprime mortgage market meltdown, the British government set a two-week deadline for a private sector rescue of Northern Rock and confirmed plans to convert billions of pounds of loans to the bank into bonds.
The financing package will tie the government to Britain's biggest casualty of the credit crunch for years to come but also increases the prospect of a private takeover, which would avoid a politically contentious nationalisation.
"The Rock" is estimated to owe the Bank of England 24 billion pounds ($47 billion) since seeking emergency funds in September after being unable to raise cash in jammed up financial markets.
The credit crunch first bit in August when banks worldwide realised they did not know which among them were dangerously exposed to U.S. subprime mortgages and stopped lending to each other. That dried up Northern Rock's main source of funds.
The bank will be temporarily nationalised if no private sector offer is acceptable, the UK Treasury said.
A U.S. holiday on Monday will offer some respite from a raft of American bank losses, which last week saw Citibank write off $18.1 billion and Merrill Lynch taking a $14.1 billion write-down, as they wrestled with huge losses stemming from U.S. mortgages lent to people ill-equipped to repay them.
But subprime damage remains very much a global phenomenon.
CHINESE, GERMAN PAIN
In Germany, WestLB's owner rallied to prop up the teetering state lender on Monday by shouldering what the bank said would be a 1 billion euro ($1.47 billion) loss in 2007 and write-downs just as big in the wake of the credit market crunch.
The announcement came a day after German financial watchdog Bafin and the central bank, the Bundesbank, attended an emergency meeting to examine how to stabilise the lender.
It puts Germany back in the spotlight as one of the countries worst affected by the credit markets crisis, which almost sank two German banks and has affected many more.
WestLB said its owners -- local savings banks and the state government of North Rhine-Westphalia -- would foot the bill.
Shares in Germany's Commerzbank shed 4.2 percent after its designated chief executive told Reuters the bank will have to make further write-downs on the value of its subprime-linked investments, although less than the 291 million euros it wrote off in the third quarter.
Societe Generale, which lost 8 percent on Friday on market rumours that the French bank could report write-downs of its own, lost another 5.3 percent on Monday, as shares headed south across the globe.
"We're falling back into the crisis of confidence in the financial sector. The banks have been reassuring the market over their exposure to U.S. mortgage-related investments, but now we realise there is nothing reassuring about it," said Hugues Rialan, managing director in charge of discretionary asset management at Robeco France.
Bank of China might post a 2007 loss because of a big write-down on billions of dollars of U.S. subprime-related investments, a newspaper reported on Monday, sending shares in the lender tumbling.
Quoting unidentified sources, the South China Morning Post said Chinese banking regulators had warned the country's leadership that Bank of China and two other state banks would make provisions for all their assets hit by U.S. mortgage defaults.
The report heightened growing concerns about China's exposure to the subprime crisis, which has hammered earnings of major European and Wall Street banks, prompting steep share falls and capital injections to shore up balance sheets.
The bank said its subprime-related assets were worth $7.95 billion at the end of September.
Money market rates, at least, continued to ease following concerted central bank action to provide short-term funds over the past month.
Three-month euro Libor was fixed lower at 4.38750 percent from 4.40938 on Friday, according to the British Bankers Association's daily fixing, the lowest since August 8.
But what state the interbank lending market would be in without ongoing central bank efforts remains very much open.
