Europe to unlock EUR trillion bank rescue

13 October 2008

BERLIN — Governments across Europe on Monday unlocked massive new rescue funds for the stumbling banking sector, as stocks soared in expectation of bail-outs set to reach a total of EUR 1 trillion.

Leaders of the 15-country eurozone single currency bloc, following the lead of Europe’s financial giant Britain, agreed Sunday in Paris on a high-stakes joint bid to pull the world financial system back from the brink of collapse.

No global price tag was announced for the plan, modelled on a scheme adopted by London last week, but the French, German, Spanish and Portuguese packages alone could total more than EUR 900 billion.

Eurozone leaders have agreed to plough billions into struggling banks and underwrite inter-bank loans, which all but dried up in the panicked month since the fall of US bank Lehman Brothers, threatening the health of the wider economy.

In Germany, Chancellor Angela Merkel’s cabinet was meeting to discuss the release of EUR 80 billion in capital and loan guarantees worth EUR 400 billion, to be put to a parliament vote this week, the finance ministry said.

Spanish Prime Minister Jose Luis Rodriguez Zapatero announced his government would underwrite up to EUR 100 billion in inter-bank loans, while Portugal has already offered a EUR 20-billion guarantee.

President Nicolas Sarkozy was to announce details of the French plan at 3:00 pm, following an emergency cabinet meeting.

Le Monde newspaper reported France would guarantee up to EUR 300 billion of loans between financial institutions, in addition to capital injections for its banks, which have so far pulled through the crisis relatively unscathed.

Austria and Italy were to make separate announcements, with the remaining eurozone members to follow suit before Wednesday, when all 27 EU states hold a summit in Brussels.

Stock markets in London, Paris, Amsterdam, Milan and Frankfurt, reeling from their worst week since the crash of 1929, rebounded sharply in expectation of the rescue, after Asia recorded strong gains.

In midday trade, Frankfurt’s stock market was up 6.15 percent and Paris soared 6.36 percent. London won 4.84 percent, Madrid rallied 6.85 percent and Zurich rocketed 7.63.

The eurozone plan is modelled on a GBP-500-billion (EUR-630-billion) British bail-out, which saw London plough GBP 37 billion Monday into a trio of banks, Royal Bank of Scotland, HBOS and Lloyds TSB.

New storm clouds emerged as the EU said it stood ready to help Hungary’s government after its currency, the forint, slumped last week. The IMF has made a similar offer.

And market authorities in Iceland, reeling from the near wipe-out of its banks, postponed the reopening of the Reykjavik stock exchange until Tuesday.

But the European plan, coming two days after the Group of Seven richest economies pledged action to shore up the world financial sector, won clear plaudits from International Monetary Fund (IMF) chief Dominique Strauss-Kahn.

"Guarantees have been given, there is complete political determination," he told French radio Europe 1. "There is no reason today, for either depositors, market actors or businesses to have anything to fear."

The head of the eurogroup, Luxembourg prime minister Jean-Claude Juncker, said the bail-out was "essential" to prevent a global financial meltdown.

"This is not about handing out gifts to bankers," he told RTL radio. "The banks we help will have to pay. This is about ensuring that consumers and investors can keep on functioning in a rational way."

"If we just stand back and do nothing, everything will collapse."

The Bank of England, European Central Bank and Swiss National Bank also moved to free up frozen lending by providing commercial banks with unlimited amounts of dollars for periods of seven, 28 and 84 days, in a joint operation that might be reinforced by Japan.

Banks worldwide need dollars to finance operations, but the market on which they would normally borrow them seized up following the collapse in the US subprime mortgage market.

[AFP / Expatica]