World races to contain contagion

World races to contain contagion 

Eurozone leaders plan co-ordinated loan guarantees and fresh capital injections 
  
French President Sarkozy (right) has been meeting with EU counterparts like German Chancellor Angela Merkel to work on a united rescue plan for eurozone banks . — AGENCE FRANCE-PRESSE

PARIS: European leaders last night raced to lay out a rescue strategy for banks battered by the financial crisis.
At a summit of the 15 leaders of the countries which use the euro as a common currency in Paris, draft plans included guaranteeing loans between banks and pumping fresh capital into struggling institutions.

Leaders hope these loan guarantees will address the unwillingness of banks to lend to each other - the root of the credit crunch.

Draft comments at press time last night said that ‘governments remain committed to avoid any failure of systemically relevant institutions, through appropriate means including recapitalisation’.

European leaders stressed they will take taxpayers’ interests into consideration, and ‘ensure that existing shareholders and management bear due consequences of the intervention.’

While money would be lent, banks would be charged at commercial rates for the service.

French President Nicolas Sarkozy, whose country currently holds the rotating presidency of the European Union, had said ahead of the meeting yesterday that he hoped to persuade his counterparts ‘to speak with once voice’.

European Commission president Jose Manuel Barroso said that European governments need ‘unprecedented’ cooperation to find a way out of the financial crisis.

The meeting in Paris was hastily arranged by Mr Sarkozy and came a day after a summit of the Group of Seven (G-7) rich nations in Washington, which offered no concrete action but promised to do whatever was needed to unfreeze credit markets.

Yesterday President Sarkozy first hosted British Prime Minister Gordon Brown, and then his 14 colleagues from the single-currency bloc, in the Elysee Palace. He met German Chancellor Angela Merkel earlier, on Saturday.

While Britain is not part of the eurozone, Mr Brown was invited because of plans to adopt an approach similar to the £50 billion (S$126 billion) bailout plan for British banks announced last week. That plan sees the government guaranteeing inter-bank lending and buying stakes in banks.

As markets enter a new trading week, the French Cabinet will hold a special session today to approve a Bill offering state guarantees and recapitalisation to banks in trouble.

Germany is also expected to unveil a bank bailout package.

British banks were in talks with the government and regulators yesterday to determine how much capital each needed from the £50 billion offered by the government last week.

Britain’s Sunday Times newspaper reported that today the four largest banks, HBOS, Royal Bank of Scotland, Lloyds TSB and Barclays, will ask for a combined £35 billion lifeline.

Coordination of actions is considered vital to contain the spreading crisis.

Capital markets are already seizing up in many parts of the world with share trading briefly or completely suspended in Russia, Iceland, Romania, Italy, Austria, Ukraine, Peru and Indonesia last week.

In Portugal, the government announced a ¥20 billion (S$40 billion) state guarantee for banks, while the Norwegian government and central bank introduced new measures to boost banks’ liquidity and ability to fund themselves, including plans to issue up to 350 billion kroner (S$82 billion) in new government bonds.

Closer to home, Australia and New Zealand gave a blanket guarantee to all bank deposits yesterday, following in the footsteps of Britain, Germany and Ireland.

Prime Minister Kevin Rudd said his government would guarantee Australia’s entire deposit base of A$600 billion (S$580 billion) to A$700 billion for three years, as well as wholesale bank funding. New Zealand Prime Minister Helen Clark announced a similar guarantee scheme but gave no time frame.

In Hong Kong, Undersecretary for Financial Services Julia Leung said that the government may use all of its foreign reserves to stabilise its financial markets. ‘We’ll use all the ammunition if we have to,’ she told Hong Kong Commercial Broadcasting.

BLOOMBERG, REUTERS, AGENCE FRANCE-PRESSE, BBC NEWS

Source : Business Times - 13 Oct 2008

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