PARIS British and European leaders took unprecedented steps here late Sunday to try to halt a galloping financial crisis in its tracks, announcing aggressive action to take big stakes in banks and guarantee lending between banks.
European Union members announced they planned to guarantee loans between banks, called inter-bank lending, for up to five years. And they intend to allow member countries to take equity stakes worth billions of dollars in troubled financial institutions. The action follows by a bit more than a week a historic $700 billion U.S. rescue package for the banking system Both efforts aim to stop a widening crisis that the International Monetary Fund warned over the weekend had brought the world to the brink of financial collapse.
The leaders of European nations presented their plan, adopted one sketched earlier in the week by Britain, as a tool kit that each country could decide how best to put to use. France, Germany and Italy are all expected to take up the plan formally on Monday morning.
"This is a worldwide crisis and, rather than tearing Europe apart, it has in fact brought us closer together," said French President Nicolas Sarkozy. "This is no easy task." Legislation is required in France, and Sarkozy expected to enact changes by week's end.
While bold, the European plan has a drawback. There were no figures to indicate how much each country will spend on bank rescues. Those numbers won't be available before Wenesday at the earliest, officials acknowledged.
German newspapers reported on their websites Sunday that Chancellor Angela Merkel will announce a $536 billion plan to rescue Germanys banking system. A week earlier, Merkel resisted calls for a Europe-wide approach.
Otto Fricke, chairman of the budget committee in Germanys parliament, told the Cologne Stadt-Anzeiger that the plan involves $134 billion for injecting capital into troubled banks and another $402 billion to guarantee loans between banks.
As in the United States, the rescue of banks is hardly a popular notion, and Sarkozy echoed statements of recent weeks made by President Bush and others. "We are not handing out gifts to banks," Sarkozy said. "We are enabling banks to operate, because our economy depends on it."
The action represents a bold move as markets reopen following what in many nations across the globe was the worst week on stock exchanges since the Great Depression.
President Bush is expected to comment on the plan Monday morning when he and Italian Prime Minister Silvio Berlusconi make a statement at the White House Rose Garden.
The plan was announced hours before Asian markets resumed Monday's trading. It showed that after small and often divisive steps in their respective countries, EU members had set aside differences in a bid to boost confidence in the global banking system.
The hasty emergency action is also EU leaders' first such coordinated aggressive move since they adopted a common currency, the Euro, now used by 15 nations. British Prime Minister Gordon Brown, himself a former finance minister, informed his European counterparts that on Monday morning Britain would be taking large equity stakes in at least four banks, according to the Times of London. He hopes to inject $85 billion or more into the shaky institutions.
According to the Times of London, the British government intends to become the leading shareholder in the Royal Bank of Scotland, or RBS, and the Halifax Bank of Scotland. The British government would take smaller positions in Lloyds and Barclays, two of the most prestigious English banks.
After meeting with Sarkozy, Brown voiced confidence that the financial markets would react positively to the plans.
"I believe that in the next few days confidence in the banking system will be restored," said Brown.
The EU also reached a tentative agreement Sunday on a French and German plan to guarantee loans between banks for periods as long as five years. This move aims to thaw the credit markets, which have frozen up as banks hoard what little capital they have and refuse to lend to each other or even brand-name corporations.
The European Central Bank and the U.S. Federal Reserve have worked furiously in recent months to provide emergency short-term loans to banks to prevent a complete halt to inter-bank lending. And last week they announced joint half-point cuts in interest rates. But these efforts have met with limited success as banks continue to lend to each other with only very high rates, meaning they arent confident in each other.
The European and British approach differs greatly from the controversial $700 billion rescue package approved with great difficulty last month by the U.S. Congress. That plan, pushed by Treasury Secretary Henry Paulson, sought to use taxpayer money to purchase distressed assets from banks to help boost their balance sheets. Most of these assets would be mortgage bonds at the root of the widening financial crisis. Although the Paulson plan is called the Troubled Asset Relief Program, or TARP, Paulson said late Friday that he was also looking to follow Britains lead in injecting money into troubled banks. Paulson and colleagues have said virtually nothing about how they would do this. The Treasury official recently tapped to head the bank rescue effort, Neel Kashkari, is slated to give his first speech on the matter Monday morning. Among the questions are how Treasury might take a stake in U.S. banks, or even which ones. One frequently rumored to be at the front of the line is Morgan Stanley. It was providing advice to Treasury until late last week when it fell victim to waning confidence and saw its share prices plunge 60 percent.
Morgan, along with Goldman Sachs, the only investment banks left standing after a turbulent summer, last month changed their status to bank holding companies. That makes them subject to the same regulation as commercial banks and, presumably, eligible for government cash injections to prevent their collapse.
In a sign of how global the problem has become, the government of Norway announced Sunday it would lend $55 billion to Norwegian commercial banks, taking distressed mortgage assets as collateral for periods up to three years. The government will issue bonds to cover the cost of lending to the banks. As in Europe and the United States, Norway saw home prices soar and is now suffering under a painful price correction.
Australia and New Zealand also announced plans Sunday to guarantee bank deposits. Australian Prime Minister Kevin Rudd said his country was facing "the economic equivalent of a national security crisis."
The World Bank said Sunday that a new $1.2 billion fund to provide emergency short-term lending to developing countries was already up and running, with $850 million worth of requests already approved or in the pipeline.
Developing and transition countries (DTCs) - many of them already hit hard by current high prices for energy and essential foodstuffs - risk very serious setbacks to their efforts to improve the lives of their populations from any prolonged tightening of credit or sustained global slowdown, the bank said in a statement. The poorest and most vulnerable groups risk the most serious and in some cases permanent damage.
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