Key European governments unveil huge bank rescue deals

14th October 2008, Comments 0 comments

Germany pledges 70 billion to recapitalize banks

Key European governments unveiled unprecedented state cash injections to steady their reeling banks on Monday, and other nations are expected to follow suit in the next few days in an emergency effort to stave off recession.

As a result of Sunday's first ever eurozone summit in Paris, the governments set up state funds to inject capital into the worst hit banks, and posted more than 1 trillion euros (1.4 trillion dollars) in guarantees to back up a revival of interbank lending.

The German, French and British intervention came with a crowd-pleasing condition: No more big bonuses for the wealthy executives of the banks that come looking for help.

Germany's rescue, to be legislated by the end of the week, will be the biggest, with a 70-billion-euro fund, plus extra leeway of 10 billion euros, earmarked to recapitalize as yet unidentified German banks.

Chancellor Angela Merkel said it would be accompanied by a 400-billion-euro guarantee to interbank lending which has almost come to a standstill.

She predicted that only a few of the deals to be guaranteed would default, so her government expected the guarantee to cost only 20 billion euros.

An about face

It was an about face for Merkel who had up till now refused to pledge government help for the ailing bank sector.

"This package serves to protect citizens, not to protect the interests of banks," she said.

German Finance Minister Peer Steinbrueck said the eurozone rescue was fundamentally different from the 700-billion-dollar purchase of illiquid assets from banks by the US government but he said Berlin would see if it needed to take over bad loans as well.

In Paris, President Nicolas Sarkozy unveiled a French rescue that includes up to 320 billion euros of guarantees to restore confidence in the interbank credit market.

To recapitalize struggling financial institutions, the French government will create a 40-billion-euro authority in which the state will be the only shareholder to inject funds into solvent banks.

"The French state will not let any bank fail," Sarkozy said. To prevent bank failures, the state will take control of ailing institutions and change their management, he added.

‘Global action’

The British government had been first up with the rescue plan, announcing early Monday it would inject 37 billion pounds (65 billion dollars) into ailing banks and posting guarantees of 250 billion pounds.

"I believe that only by global action can we fully restore the confidence needed to build the international financial order," said Prime Minister Gordon Brown.

The moves followed consultations with European Union leaders, US President George W. Bush and the World Bank and International Monetary Fund (IMF) over the weekend. Britain and the 15 eurozone countries met on Sunday in Paris.

The British injections will make the British government the biggest shareholder in the Royal Bank of Scotland (RBS) and a merged Lloyds TSB and Halifax Bank of Scotland (HBOS).


Austria unveiled a similar program. The Alpine republic is to offer up to 15 billion euros to increase its banks' capitalization and up to 85 billion euros to guarantee interbank lending.

In euro terms, the four governments' guarantees total 1.12 trillion euros in guarantees and 172 billion euros in funds.

Late in the day, Italy's government approved Monday a decree containing similar measures to shield the country's banks.

Economics Minister Giulio Tremonti said the cost of the aid could not be quantified at this stage.

Germany said the guarantees for interbank lending would be offered at a commercial rate of interest, 2 percent, to any bank.

A price to pay

However, the cash injections for banks on the brink of default will come with a different kind of price tag: a pay cap.

Brown said there would be no more "incentives for irresponsibility" and that remuneration at banks rescued by public funds would be based on performance and the creation of long-term value.

And Steinbrueck said there would be no fat incentives or big severances at banks that need bailing out.

Sarkozy also vowed to do away with exorbitant severance payments to executives who have incurred unreasonable risks.

Changing rules

Smaller eurozone nations may announce similar packages this week. Legislatures must rush through bills to authorize the rescue. Paris and Berlin both said they hope to have legislation passed before the week is out.

Merkel said there would be a "second building block" to the rescue: changes to international rules.

"In my view that includes strengthening the role of the International Monetary Fund in oversight of financial institutions," she said.

The European Commission blessed the rescue packages, setting out rules that EU member states should follow. One is that any guarantees they offer apply to all banks on their territory.

Pitching in

Leading banks welcomed the moves, which follow weeks of ad-hoc action to underpin individual banks by the European governments, which had hoped the financial markets would come right all by themselves.

Germany's two leading commercial banks, Deutsche Bank and Commerzbank, welcomed the eurozone plan. Deutsche called it "an important step towards restoring a functioning financial market."

Commerzbank said it expected Berlin's move would end the constriction of liquidity among the banks. German stock markets rallied earlier Monday as news of the impending rescue emerged.

The federal government is to demand that Germany's 16 states shoulder about one-third of the end costs of the rescue, an associate of Merkel said in Berlin.

"The idea is that the states carry 35 per cent of the costs that have to be met when this is all over," Ronald Pofalla, general secretary of Merkel’s Christian Democratic Union said.

Leaders of two states, Bavaria and Hesse, voiced immediate opposition to sharing the cost.


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