European Leaders Vow Bank Guarantees, Bid to Stop Financial Rot

By James G. Neuger

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

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

The statement gave no indication of how much governments were willing to spend or the size of bank assets deemed at risk, and European officials refused to estimate the price tag of the measures. Those numbers will start to emerge today, when France, Germany, Italy and other countries announce national measures.

Bank recapitalizations may reach 300 billion euros ($406 billion), Goldman Sachs Group Inc. analysts said today.

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.

The euro, which last week fell to an 18-month low against the dollar, rallied today. The euro rose 1.5 percent, the most since Sept. 22, to $1.3613 at 8:20 a.m. in London, from $1.3408 in New York on Oct. 10. It added 1.6 percent, the most since Sept. 19, to 137.18 yen, from 134.96.

``What has been done over the last three days should provide elements of reassurance,'' Dominique Strauss-Kahn, chief of the International Monetary Fund said on French radio Europe 1 today. The worst of the financial crisis ``may be behind us.''

Stocks rallied worldwide, with the MSCI World Index rebounding from its worst week on record. The Dow Jones Stoxx 50 Index jumped as much as 6.6 percent after last week's 22 percent plunge.


`Hour of Europe'

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.

``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.

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.

ECB Guarantees

``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.

In the U.K., Royal Bank of Scotland Group Plc, the second- biggest U.K. bank before shares collapsed last week, today ousted its chief executive and turned over control to the government in exchange for a 20 billion-pound ($34 billion) lifeline. Lloyds TSB Group Plc cut the terms of its takeover offer for HBOS Plc and said will raise 17 billion pounds ($29 billion) of capital.

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.

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