Europe's leaders agree on rescue plan and pledge no financial institutions will fail

Published on Sunday 12 October 2008 22:05

EUROPEAN leaders pledged at an economic crisis summit in Paris last night that no major financial institution will be allowed to collapse.

After a week of chaos on the markets, the eurozone countries endorsed radical plans to guarantee interbank lending and inject capital into major institutions at risk of failure.

News of the rescue plan came from the French President, Nicolas Sarkozy – the current head of the European Union – after hours of talks between leaders of the 15 countries in the euro single currency zone. The Prime Minister, Gordon Brown, who is not a member of the eurozone club, also attended parts of the talks.

Mr Sarkozy said leaders had agreed a framework in which individual countries would be able to inject capital into their own banks by means of preference shares.

He said governments in Germany, France and Italy among others would be presenting their individual plans today, within the agreed framework.

"The crisis has over the past few days entered into a phase that makes it intolerable to opt for procrastination and a go-it-alone approach," he said.

Mr Sarkozy said the guarantees would be at commercial rates, and he stressed that what he called defective managers would be removed – and rash shareholders would not benefit from the public intervention.

He said the plan addressed all aspects of the financial crisis. However, he did not say how much it would cost.

Mr Brown, said the measures – which are based on a 500 billion UK bank rescue package that he announced last week – were the best way of restoring "confidence" to the shattered international system.

He said: "I believe that we will see over the coming few days worldwide action that will make people see that confidence in the banking system can be restored."

Analysts said Europe's plan could help check the slump and markets initially responded well. The New Zealand dollar opened stronger and German stocks rose 5 per cent in weekend off-exchange trading with big jumps in bank stocks.

"It's got to be a bit of a confidence-builder, said John McCarthy, vice president of foreign exchange at ING Capital Markets in New York. But he said it remained to be seen whether the initial reaction would hold.

The plan includes state guarantees for new medium-term bank debt, state injections of capital into banks and help from the European Central Bank to unfreeze commercial paper markets, which would provide companies with vital access to funding and help stave off an economic slump.

The International Monetary Fund also expressed hope that the situation would be stabilised by the EU move, which comes after the US signed up to a similar approach.

However, City traders are braced for more turbulence today when banks reveal how much cash they need to stay afloat. Altogether institutions are expected to ask for up to 50 billion in fresh capital in return for shares – with the taxpayer making up whatever cannot be raised from private investors.

Meanwhile in Washington, the US was working on ways to buy stakes in struggling banks and other financial firms, an idea that until recently would have been anathema to the world's largest economy.

Finance officials around the world were racing to clinch a rescue strategy for banks, battered by the worst financial crisis since the 1930s, before markets reopen on Monday.

At the centre of the storm

Gordon Brown, the Prime Minister, has seen his currency rise both at home and on the world stage as the crisis bites.

Nicolas Sarkozy, the president of France, wanted the 15 Eurozone countries to "speak with one voice" ahead of a summit this week.

Jos Manuel Barroso, the president of the European Commission, called for an "unprecedented level of co-operation" to deal with the financial crisis.

Jean-Claude Juncker heads the Euro group of Eurozone finance ministers. He wants to ensure that no major banking institution fails.

Jean-Claude Trichet is president of the European Central Bank. Last week he called for bankers and markets to be given time to digest the changes.

UK impounds 1bn extra from Iceland

BRITISH hopes of recovering money held in Icelandic banks have increased after it emerged that UK authorities had frozen more than 4 billion of assets under anti-terror legislation.

Sums well in excess of the 3 billion owed to UK savers, councils and other public bodies had been impounded by the Westminster government, it was confirmed yesterday.

However, Yvette Cooper, the Treasury minister, said that proper processes had to be followed and it would not be the case that the impounded reserves could be used to pay off the sums owed to British investors by the newly nationalised Icelandic banks.

More than 200,000 UK savers found themselves at the centre of the international banking crisis last week when the Icelandic internet bank Icesave collapsed. Alistair Darling, the Chancellor, stepped in to safeguard all private deposits. But the same protection has not been offered to more than 100 UK local authorities with almost 1 billion invested in three Icelandic banks, including Landsbanki.

Negotiations will resume this week, in the hope of the funds being released.

Eight Scottish councils are caught up in the Icelandic collapse, with sums at risk totalling 45.5 million.