We've got a plan to solve the crisis, insist G7 nations

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THE G7 group of nations have formulated an "aggressive" plan to counter the global economic crisis, they said last night.

Henry Paulson, the US Treasury Secretary, said the G7 finance ministers "finalised an aggressive action plan to address the turmoil in the global financial markets and the stresses in our financial institutions".

The United States also appeared to look to Britain for a solution, as it unveiled plans to buy stakes in its financial institutions. Mr Paulson unveiled the tactic following an emergency meeting of the G7 in Washington. It mirrors a rescue package unveiled by Gordon Brown, the Prime Minister, and Alistair Darling, the Chancellor, this week.

The wider, five-point G7 plan is:

• Take decisive action and use all available tools to support important financial institutions and prevent their failure.

• Take all steps to unfreeze credit and money markets.

• Ensure banks can raise capital via public and private sources.

• Ensure national deposit guarantee programmes are robust.

• Take action, where appropriate, to restart the "secondary markets" for mortgages and other assets.

However, there was no further detail last night.

In a surprisingly brief statement after their meeting, the G7 also stopped short of backing a UK plan to guarantee lending between banks – a move many on Wall Street saw as vital.

"The G7 agrees the current situation calls for urgent and exceptional action," the statement by US, Canada, Britain, France, Italy, Germany and Japan said.

Finance leaders are to continue meeting this weekend to agree a global solution.

Analysts said the summits, which involve the G7 and G20 nations, as well as the International Monetary Fund and World Bank, are of "truly monumental importance".

Eurozone countries will also hold an urgent summit tomorrow. French President Nicolas Sarkozy's office said the Paris meeting was designed "to define a joint action plan" among the 15 countries using the euro currency and the ECB.

Mr Brown said he was trying to persuade counterparts to restructure the global financial system but it "would take time".

The meetings come after a day of devastation on the world markets, which saw the FTSE 100 plunge 10 per cent on opening and trading across Europe go the same way. The London index endured its worst week since the Black Monday crash of 1987, tumbling 8.9 per cent and surpassing even Monday's record sell-off.

In the United States, the Dow – which bore heavy losses on Thursday – opened with a sickening thud, before levelling off to a loss of about 3 per cent.

George Bush, the US president, then made a public appeal for trust that the US could cut through the "uncertainty and fear" of the financial crisis. "The world is sending an unmistakable signal: we're in this together and we will come through this together," he said.

Mr Darling, who is representing the UK in Washington, warned it was "essential" that the world's leading economies took action. "This is a genuinely global problem and we, all of us, all over the world, need to do something about it," he said.

Meanwhile, Standard Life Investments warned the UK will see a "long and complex recession". Andrew Milligan, head of global strategy at the Edinburgh-based fund managers, said: "Consensus forecasts are still too optimistic, in terms of economic growth or corporate earnings."

The past week has seen a raft of unilateral national actions against the crisis. But the only joined-up thinking has been in interest rate cuts, announced on Wednesday, by the UK, the US Federal Reserve, the European Central Bank and other nations.

Charles Diebel, a rate strategist at the broker Nomura, said: "It's time for the kitchen sink – as in, throw everything there is at the problem and in such scale that the 'shock and awe' break the current cycle of fear."

Taro Aso, the premier of Japan, said he would call an emergency G8 summit if none of the scheduled summits reached a deal.

Analysts believe that the crisis could be stymied if the G7 nations make a joint move toward an action similar to the British bank bail-out.

John Ryding, an economist at RDQ Economics, said that by offering to inject capital into troubled banks, the UK had provided a "glimmer of hope," especially after Washington said it would consider similar actions.

Mr Brown added: "We are restructuring the banking system and we are doing everything we can. What we need is for other countries to do similar things."

It came as Barclays said it was looking at a range of options to boost its finances amid speculation the bank may go to existing investors before drawing on the government rescue fund.

There were also calls for further interest rate cuts as interbank lending rates remained high and panic persisted.

Howard Archer, chief UK and European economist at Global Insight, said: "Something has got to happen; the situation is not getting any better."

The G7 meeting began last night, with the G20 nations to meet today and the 185 members of the IMF and the World Bank on Monday.

BILL JAMIESON ON AN EPOCHAL STORM

STEPHEN McGINTY ON THE PSYCHOLOGY OF FEAR

And now, plan B: Three cannons and a super-bazooka

"PLAN A" has seen extraordinary actions by central banks and governments in the past few days, writes Bill Jamieson. But they have failed to contain, let alone diminish, the financial crisis.

So what comes next? What is Plan B? There are three cannons still to fire – and a super-bazooka.

1 Further cuts in interest rates are urgently required. This would improve bank profits, let them pass on further rate cuts to mortgage borrowers and anxious businesses, and help confidence in the real economy.

2 There needs to be a far more co-ordinated international response. Traders will be watching the G7 meeting this weekend, hoping ministers will consider guaranteeing lending between banks – which could bring down London Inter-Bank Offered Rate, the relentlessly high key lending rate.

3 US Treasury secretary Hank Paulson referred to his $700 billion Troubled Assets Recovery Plan – to buy in the toxic paper of the US banks – as a "bazooka".

Now there is talk of a "super bazooka" – the US Treasury copying the UK plan to recapitalise major banks with cash injections via preference shares.

4 Nuclear options: the economists Alberto Alesina and Guido Tabellini suggest governments should guarantee not only deposits but also bank loans.

The problem, they say, is one of financial panic, which needs to be cauterised.

The men - and woman - who'll try to save the world this weekend

These are the G7 finance ministers tasked with trying to stem the financial chaos. They began meeting last night.

CANADA: Jim Flaherty

Has announced that the Canadian federal government will pump 12.8bn into the country's banking system. He says it is not a "bail-out" but a measure to help improve credit conditions for everyday Canadians who need a loan if they want to buy a car or a home.

FRANCE: Christine Lagarde (right)

The first female finance minister of a G8 economy, Lagarde was named 12th most powerful woman in the world last year by Forbes magazine.

GERMANY: Peer Steinbrueck

Angela Merkel's unilateral savings guarantee sparked a major row. Mr Steinbrueck said earlier in the week that the impact on the German economy "will be more severe" than thought.

ITALY: Giulio Tremonti

Insists banking system is robust. Believes causes of crisis in Europe are unclear and said: "The crisis started from Iceland ... and expanded into the City of London."

JAPAN: Shoichi Nakagawa

Is expected to propose in Washington an emergency International Monetary Fund loan programme, to help emerging and small economies. Japan yesterday lost its first major firm to the crisis, Yamato Life Insurance.

UK: Alistair Darling

Much maligned for warning that the economic crisis was going to get worse – just before it did. A former lawyer, he has won plaudits from analysts for "learning on the job" since taking over as Chancellor.

US: Henry Paulson

Has lent his name to the 380 billion bail-out – now known as the Paulson Plan. By kneeling in Congress to beg speaker Nancy Pelosi to pass the bill, he provided an enduring image of the financial meltdown.

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