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European leaders agree on financial crisis rescue

European leaders agree on financial crisis rescue
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First Published: Mon, Oct 13 2008. 09 24 AM IST
Updated: Mon, Oct 13 2008. 09 24 AM IST
Paris: European Union leaders hammered out a plan on Sunday to confront the financial crisis which will involve hundreds of billions of dollars of new initiatives to head off a feared “meltdown.”
Two weeks after the Wall Street collapse of Lehman Brothers unleashed a worldwide crash on stock markets, US and European leaders signalled a growing commitment to take joint action to end the turmoil.
After the Group of Seven leading democracies proposed an action plan at weekend meetings in Washington, a Paris summit of the 15 nations that use the euro currency agreed on a bank rescue plan, French President Nicolas Sarkozy said.
Sarkozy - who oversees the French presidency of the European Union - said governments would buy into banks to boost their finances and guarantee inter-bank lending.
British Prime Minister Gordon Brown said the coming week was critical.
“I believe that in the next few days confidence in the banking system will be restored.... The decisions we take over the next few days will affect us for the years ahead.”
“My opinion is that it should produce positive results,” added Spanish Prime Minister Jose Luis Rodriguez Zapatero. “We have a serious crisis and logically when there is a serious crisis it will be difficult to overcome, but we will overcome it.”
Europe’s economic powerhouses all prepared new initiatives to underpin the banking system. No details were released, but Sarkozy said Britain, France, Germany and Italy and others would unveil packages on Monday.
Officials have said they will cost several hundred billion dollars on top of the huge sums already spent rescuing banks and supporting money markets.
In Washington, the EU action won swift praise from International Monetary Fund chief Dominique Strauss-Kahn, who recalled how the IMF has been calling for months for coordinated international action.
“Nearly all advanced countries are now covered and the... eurozone provisions may be extended eventually to all of Europe,” he said.
“The eurozone plan is also comprehensive.... Altogether we are going in a good direction.”
Economists were eagerly awaiting the opening of Asia’s stock markets on Monday to gauge how their rescue plans are received by jittery investors hoping to stem the slide in the markets.
In another development on Sunday, news media in London reported that the British government would be taking controlling stakes Monday in two banks hit hard by the crisis - Royal Bank of Scotland and HBOS.
Britain has already set aside £250 billion to guarantee loans, in addition to £200 billion in short-term loans and £50 billion to buy stakes in major banks.
Chancellor of the Exchequer Alistair Darling said an announcement would come “at the beginning of the week.”
Germany is meanwhile expected to guarantee interbank loans with euro300 billion to euro400 billion euros as well as provide banks with fresh capital in exchange for shares.
German Chancellor Angela Merkel said only the state could restore “the necessary trust” to the public and financial markets.
In Paris, the French government will on Monday propose a state guarantee for endangered banks, a ruling party lawmaker said.
The New York Times said the Bush administration was also heading toward taking direct stakes in threatened banks in the coming days, as the crisis dominates the run-up to the 4 November presidential election.
Elsewhere, Australia, New Zealand, the United Arab Emirates and Portugal all moved to guarantee bank deposits, and Norway said it would issue up to euro41 billion in bonds to pay for measures to support banks.
In Washington, Strauss-Kahn said the action plan adopted Friday by the Group of Seven was a breakthrough with the first global pledge to cooperate to stabilise the turmoil at the meetings.
The G7 plan, though vague on details, commits countries to support the most important institutions, take measures to get credit flowing, assist banks in raising capital and reassure savers.
World Bank president Robert Zoellick said the financial crisis, the worst since the 1929 market crash, underscored the need for coordinated action to “modernize multilateralism for a new global economy.”
Zoellick announced that the International Finance Corp, the private-sector lending arm of the World Bank, was exploring the possibility of a fund to help recapitalize banks in the developing world.
US President George W. Bush said the world’s richest nations are united on a “serious global response” to the financial meltdown caused by massive loans to US lenders with bad credit histories.
Coordination against the crisis is considered vital to prevent the actions of one country harming another and exacerbating the bank solvency and credit shortage problems.
In the Great Depression, so-called “beggar-thy-neighbour” measures taken unilaterally by countries are considered to have deepened the economic pain.
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First Published: Mon, Oct 13 2008. 09 24 AM IST