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Europe preparing plan to avert meltdown

Europe preparing plan to avert meltdown
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First Published: Sun, Oct 12 2008. 11 17 PM IST

Weighing options: (clockwise from left) European Central Bank president Jean-Claude Trichet (with back to camera), British Prime Minister Gordon Brown, European Commission president Jose Manuel Barros
Weighing options: (clockwise from left) European Central Bank president Jean-Claude Trichet (with back to camera), British Prime Minister Gordon Brown, European Commission president Jose Manuel Barros
Updated: Sun, Oct 12 2008. 11 17 PM IST
Paris / Washington: European leaders hoped to agree on a detailed plan in Paris later on Sunday to prevent market panic and stave off what the International Monetary Fund (IMF) warned could be a global financial meltdown.
In Britain, banks were in crisis talks with the government and regulators that could see the government take multi-billion-pound stakes in several lenders.
Across the globe, Australia and New Zealand said they would guarantee bank deposits, and Gulf Arab states took emergency measures to boost confidence in the financial system.
IMF said it backed a plan by the Group of Seven leading industrialized nations to stabilize markets. Bold action was needed to persuade banks to resume lending and bring an end to a credit crunch that has pushed global stocks to five-year lows, it said.
Weighing options: (clockwise from left) European Central Bank president Jean-Claude Trichet (with back to camera), British Prime Minister Gordon Brown, European Commission president Jose Manuel Barroso and France’s President Nicolas Sarkozy at a meeting in Paris on Sunday. AFP
“Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown,” IMF chief Dominique Strauss-Kahn said late on Saturday.
In Washington, US President George W. Bush met G-7 economic chiefs and officials from IMF and the World Bank over Friday and Saturday, but they failed to agree on concrete measures to end the crisis.
Bush said he was confident the countries could overcome the challenges, and that Washington was working as fast as possible to implement a $700 billion financial bailout package.
The American Standard & Poor’s 500 index tumbled more than 18% last week, its worst weekly fall on record, while European stocks plunged 22% and Tokyo’s Nikkei crashed 24%.
Coordinated interest rate cuts from central banks failed to soothe investors’ nerves and credit markets remained logjammed.
The scene shifted from Washington to Paris on Sunday.
French economy minister Christine Lagarde said before leaving Washington that the summit of euro zone leaders would go beyond talking about remedies to “put meat, muscles on the bones of that skeleton and to develop, follow up and execute upon it”.
French President Nicolas Sarkozy and German Chancellor Angela Merkel said they had prepared a number of decisions to present to the meeting to try to restore normal flows. A source close to the French presidency said leaders of the euro zone countries would discuss the possible creation of a bank rescue package that would take Britain’s initiative as a reference.
EU Commission president Jose Manuel Barroso said he was hopeful the meeting would take an important step forward.
“We must show European citizens and the markets Europe’s capacity and determination to act in concert,” he said.
Sarkozy was meeting British Prime Minister Gordon Brown ?—whose country is not in the euro zone?—European Central Bank president Jean-Claude Trichet and European Commission president Jose Manuel Barroso before the summit of euro zone leaders kicked off later.
In an interview with Britain’s The Observer newspaper, Brown said he would try to broker a Europe-wide bailout of banks modelled on Britain’s intervention, and that the “stakes could not be higher” for jobs, mortgages and the economy.
In London, big British banks were likely to announce plans to recapitalize early on Monday, a person familiar with the matter said.
The Sunday Times said Royal Bank of Scotland Group Plc., HBOS Plc., Lloyds TSB Plc. and Barclays Plc. could ask for a combined £35 billion. Spokespeople for all four banks declined to comment.
Media reports on Saturday said Germany was preparing a rescue package that could be worth up to $549 billion, including an injection of equity capital worth “double digit” billions into its banks, and guarantees for interbank lending.
Under Australia’s plan, all deposits in the country’s banks, building societies and credit unions, would be guaranteed by the Australian government for the next three years, Prime Minister Kevin Rudd said.
Japan and South Korea agreed to push ahead with plans for a foreign exchange pool to be used in the event of an Asian financial crisis, reports said.
Japanese finance minister Shoichi Nakagawa and his South Korean counterpart Kang Man-Soo agreed to help launch a multilateral currency swap scheme for Asia, when they held talks in Washington on the sidelines of the Group of Seven finance chiefs’ meeting, Jiji Press and Kyodo News wire services reported.
The ministers agreed to speed up implementation of an agreement in May by finance ministers of 13 Asian nations to set up a foreign exchange pool of at least $80 billion (Rs389,600 crore) to be used in the event of a regional financial crisis, the reports said.
A top Chinese central banker criticized rich nations for the problems in the global financial system, and called on IMF to improve its monitoring of developed nations which had “weak financial policy discipline”.
Gulf Arab states also took measures, including a rare Saudi interest rate cut and a pledge by the United Arab Emirates to protect national banks and guarantee deposits.
Portugal said it will offer a financing line worth up to €20 billion ($27.45 billion) to guarantee liquidity of its banks.
D. Subbarao, governor of the Reserve Bank of India, told the IMF in Washington on Saturday that he welcomed coordination among developed economies to manage the crisis, but implications of such a management on emerging economies should be factored in.
“...Emerging and developing economies should be taken into confidence and consulted whenever the policies and actions of the developed countries have implications for them,” he said.
The comments were posted on the central bank’s website on Sunday.
Subbarao said that equity and forex markets provided the channels through which the global crisis spread to the Indian system, which in turn had an indirect impact on the money, debt and the credit markets.
Bush said the world’s richest economies were united on a “serious global response” to the financial meltdown.
IMF chief Dominique Strauss-Kahn claimed a breakthrough with the first global pledge to cooperate to stabilize the turmoil. He had earlier warned, however, that the financial system risked collapse.
“Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown,” he said.
No details have yet been released, but there were signs that the 15 were leaning towards adopting a British-style operation under which the state guarantees inter-bank lending and buys stakes in banks.
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AFP’s Adam Plowright from Washington, DC, contributed to this story.
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First Published: Sun, Oct 12 2008. 11 17 PM IST