EU Nations Commit 1.3 Trillion Euros to Bank Bailouts

By Gregory Viscusi

Oct. 13 (Bloomberg) -- France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.8 trillion) to guarantee bank loans and take stakes in lenders, racing to prevent the collapse of the financial system.

The announcements came as Britain took majority stakes today in Royal Bank of Scotland Group Plc and HBOS Plc. The coordinated steps followed a pledge yesterday by European leaders to bolster market confidence as the global economy slides toward recession.

``What it should do is stabilize the banking system,'' said Peter Hahn, a fellow at London's Cass Business School and former managing director at Citigroup Inc. ``Will it stop us from having a recession? No, nothing is going to stop us from having a recession.''

The agreement among heads of the 15 countries using the euro helped trigger a rally in stocks and the euro after a market rout. The Dow Jones Stoxx 600 Index rebounded a record 10 percent today, after slumping 22 percent to the worst drop in its two-decade history last week. The currency had its biggest gain in three weeks, climbing 0.9 percent to $1.3526.

In Germany, Chancellor Angela Merkel pledged to guarantee up to 400 billion euros of lending between banks and set aside 20 billion euros to cover potential losses. It will also provide as much as 80 billion euros to recapitalize banks, about 3.2 percent of the German economy, based on 2008 gross domestic product figures from the International Monetary Fund.

The U.S.'s $700 billion package to buy toxic bank debt and possibly recapitalize banks, is 4.9 percent of its GDP.

French Plan

In France, President Nicolas Sarkozy said the state will guarantee 320 billion euros of bank debt and set up a fund allowed to spend up to 40 billion euros, or 2 percent of GDP, to recapitalize banks.

``The greatest risk is in inertia,'' Sarkozy said today.

The French government has already taken steps to protect banks caught up by the credit squeeze. France, along with Belgium and Luxembourg, last week guaranteed the borrowings of Dexia SA, extending a 6.4 billion-euro bailout of the world's largest lender to local governments.

Banks in France may be holding up better than most U.S. and European rivals. BNP Paribas SA, France's largest bank, last week agreed to take control of Fortis in Belgium and Luxembourg for 14.5 billion euros, completing a breakup of what was once Belgium's largest financial-services company.


Spanish Measures

Spain's cabinet today approved measures to guarantee up to 100 billion euros of bank debt this year and authorized the government to buy shares in banks in need of capital. Prime Minister Jose Luis Rodriguez Zapatero told a news conference in Madrid that no banks needed recapitalizing now and the measure was ``preventative and precautionary.''

Before Europe forged a common response to the crisis, Spain was one of the countries to produce unilateral measures to shore up banks, pledging to buy up to 50 billion euros of assets.

The Austrian government will set up an 85 billion-euro clearinghouse run by the Austrian Kontrollbank to provide cash by holding illiquid bank assets as collateral. Austria also pledged to buy banking shares if and when domestic financial institutions seek to sell new stock.

The Dutch government will guarantee up to 200 billion euros of interbank loans, it said in a letter to parliament.

Italy will guarantee some bank debt and buy preferred stock in banks if necessary, Finance Minister Giulio Tremonti said in Rome, without providing any figures.

Tremonti said Italy would put forward ``as much is necessary'' to shore up the country's banking system.

`Case-by-Case' in Italy

``It's not a fund,'' he said. ``It will be done on a case- by-case basis, if there is a case.''

Italy's biggest bank, UniCredit SpA, announced a 6.6- billion-euro capital increase last week. Prime Minister Silvio Berlusconi said yesterday that no other Italian banks were facing cash problems.

Britain wasn't part of last night's agreement because it doesn't use the euro, although Prime Minister Gordon Brown sat through the start of the meeting and presented measures already underway in Britain. Royal Bank of Scotland, HBOS, and Lloyds TSB Group Plc will get an unprecedented 37 billion-pound ($64 billion) bailout from the U.K. government, equal to 2.5 percent of the economy.

In exchange, Royal Bank of Scotland and HBOS will cede majority control to the government; give Brown seats on their boards; the right to halt dividends and power to limit executives' bonuses. RBS Chief Executive Officer Fred Goodwin and HBOS CEO Andy Hornby will also step down.

Money Markets

The collective European announcements contrast with the European Union's failure a week ago to agree on Europe-wide measures. Yesterday's accord left each country free to formulate individual plans to take into account differing legal systems, and so that any eventual bank rescues aren't held up by the need to get the approval of other EU governments.

``The key factor to look at is what happens now to interbank lending rates, because it's only by reigniting bank lending that we can soften the blow of this crisis,'' said Isabelle Job, an economist at Credit Agricole in Paris. ``There will be collateral damage on the real economy, we'll just have to follow the indicators.''

Yesterday's accord, combined with the Federal Reserve's promise today of unlimited dollar funding, helped nudge money- market rates lower. The London interbank offered rate, or Libor, for three-month dollar loans dropped 7 basis points to 4.75 percent today, tied for the largest drop since March 17, the British Bankers' Association said.

To contact the reporters on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net.