Europe Offers Bank Support to Halt Financial Meltdown

By James G. Neuger

Oct. 13 (Bloomberg) -- European leaders agreed to guarantee new bank debt and use taxpayer money to keep distressed lenders afloat, trying to stop the worst rout in Europe's stock markets in two decades and stave off a recession.

At a summit chaired by French President Nicolas Sarkozy, leaders of the 15 countries using the euro hammered out an unprecedented battle plan for bandaging the crippled credit markets and halting panic among investors.

``We need concrete measures, we need unity, which is what we achieved,'' Sarkozy told a press conference late yesterday at the Elysee Palace in Paris. ``None of our countries acting alone could end this crisis.''

As they improvised a response to the banking calamity that started on Wall Street, toppling Lehman Brothers Holdings Inc., Europe's leaders sought to go beyond pledges made by the Group of Seven and deflect criticism that they were making scattershot country-by-country efforts without a credible joint strategy.

``The steps taken in Europe are very positive,'' billionaire investor George Soros said in Washington yesterday. ``The European governments have got religion and realized this is a serious problem they have to address.''

The key measures announced were: a pledge to guarantee until the end of 2009 bank debt issues with maturities up to five years; permission for governments to buy bank stakes; and a commitment to recapitalize what the statement called ``systemically'' critical banks in distress.

European Banks

European banks have written down $226.8 billion out of a worldwide total of $635 billion since the U.S. subprime mortgage collapse last year set off the market crisis, according to data compiled by Bloomberg.

Yesterday's agreement helped stem a decline in the euro that sent the currency to an 18-month low against the dollar. The euro rose 1.5 percent, the most since Sept. 22, to $1.3607 at 9:07 a.m. in Tokyo, from $1.3408 in New York on Oct. 10. It added 1.6 percent, the most since Sept. 19, to 137.05 yen, from 134.96.

``They pushed the boat out as far as they could,'' said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. ``It should start bringing down market rates over the course of the week. If that package doesn't help, things could really go pear-shaped for the euro area.''

The statement gave no indication of how much governments were willing to spend or the size of bank assets deemed at risk, leaving unclear the ultimate cost to the taxpayer. Those numbers will start to emerge today, when France, Germany, Italy and other countries announce national measures.


`Hour of Europe'

Yesterday was ``the hour of Europe, demonstrating its unity,'' Sarkozy said. Today ``each country will draw the consequences of what Europe decided.''

More than $25 trillion has been erased from global equities in 2008. European benchmark stock indexes tumbled 22 percent last week, the steepest slide in two decades. The Dow Jones Industrial Average notched its worst week since 1914. The MSCI World Index of stocks in 23 developed countries slid 20 percent, the most since records began in 1970.

After the markets dove, finance officials from the G-7 --the U.S., Japan, Canada, with Europe represented by Britain, France, Germany and Italy -- meeting on Oct. 10 in Washington signaled a determination to intervene without taking concrete steps.

Sarkozy Summits

The euro-15 summit was the second hosted by Sarkozy in eight days, a sign of the speed at which the credit crunch has paralyzed Europe, shaking the foundations of the banking system and threatening to plunge the euro region into its first recession since the currency was created in 1999.

Anglo-Irish Bank Corp. Plc, Ireland's third-biggest lender, and ING Groep NV, the largest Dutch financial-services provider, plunged more than 42 percent last week, leading declines in banks and insurers.

``We don't expect an immediate miraculous result,'' European Commission President Jose Manuel Barroso said.

Often criticized for a preoccupation with inflation, the European Central Bank abruptly reversed course last week, cutting interest rates for the first time since 2003 in a move coordinated with the U.S. Federal Reserve and four other central banks.

Commercial Paper

The ECB doesn't have the legal power at the moment to follow the Federal Reserve and buy commercial paper to unblock a financing tool that drives everyday commerce for many businesses, said President Jean-Claude Trichet, a participant in yesterday's Paris meeting.

``We are looking at our entire system of guarantees and we can imagine new measures to enlarge access to our system of guarantees,'' Trichet said.

Europe's divisions were laid bare by Sarkozy's initial decision to restrict the crisis-management summit to leaders of countries using the euro, leaving out Prime Minister Gordon Brown of Britain, home to Europe's largest financial market.

Brown, sensing an opportunity to reverse plunging poll ratings by showing leadership in a crisis, last week set up a 50 billion-pound ($85 billion) program to invest in at least eight British lenders and pressed euro-region leaders to concoct similar plans.

A late addition to the guest list, Brown spoke at the start of the session before hastening back to London to work on new steps to stop the financial rot in the U.K., possibly to be announced before the markets open today.

`Working Together'

``European leaders have come together in the recognition that although they can do things individually they are far better achieving something that is bigger by working together,'' Brown said.

Brown's government will today take controlling stakes in Royal Bank of Scotland Group Plc and HBOS Plc, two people familiar with the plan said. The government will name representatives to the boards of both banks and work with the management on issues including executive pay, said the people, who spoke on condition of anonymity because the information is confidential.

Portugal yesterday announced that it will make as much as 20 billion euros ($27 billion) available in guarantees for the financing operations of its banks. Norway, not a European Union member, offered banks as much as $55.4 billion in government bonds in exchange for mortgage debt.

In the U.S., Treasury Secretary Henry Paulson will tap some of the $700 billion financial-rescue package approved by Congress this month to buy equity in financial companies.

German View

At Sarkozy's first crisis-response meeting, on Oct. 4 in Paris, leaders of France, Germany, Britain, Italy, Luxembourg, the ECB and European Commission stopped short of setting up a regional bailout fund.

There were signs that German Chancellor Angela Merkel, an initial opponent of French calls for a joint bank-rescue fund, was rethinking her stance.

A German program may allot up to 100 billion euros to recapitalize private banks, state banks and insurers, Handelsblatt reported over the weekend, citing unidentified officials. Merkel said the plan would involve ``providing banks with sufficient capital so that they are able to operate on their own -- and I don't rule out that there could be capital support.''

To contact the reporter on this story: James G. Neuger in Paris at jneuger@bloomberg.net