Europe's Leaders, Threatened With `Disaster,' Set New Strategy

By Simon Kennedy and Sandrine Rastello

Oct. 12 (Bloomberg) -- European leaders meet today to forge a new set of measures to combat the credit freeze after their failure to act a week ago contributed to the worst sell-off in the region's stocks in two decades.

French Finance Minister Christine Lagarde said leaders will aim to put ``meat and muscles'' on a commitment to safeguard key banks. German Chancellor Angela Merkel, whose government earlier this month rejected French suggestions to form a joint bank-rescue fund, said yesterday the euro region will implement ``the same toolbox of instruments.''

Merkel, French President Nicolas Sarkozy and their counterparts in the 15-nation euro region are being forced to shift stance after a deepening slide in financial markets threatened to tip Europe into a prolonged recession.

``Measures by euro-area governments to end the financial crisis have been uncoordinated and insufficient,'' said Juergen Michels, a Citigroup Inc. economist in London. ``Increasing risks of an economic disaster might force governments to set up more coordinated and more comprehensive measures.''

The euro-area leaders, along with U.K. Prime Minister Gordon Brown and European Central Bank President Jean-Claude Trichet, will meet today in Paris from 5 p.m. They gather after finance chiefs from the Group of Seven nations established guidelines on Oct. 10 for combating the credit crunch, while falling short of adopting new initiatives.

`More Muscles'

``Some of us hoped it had had more teeth or more muscles to it but at least it was endorsed,'' Lagarde told reporters in Washington yesterday, referring to the G-7 statement. Sarkozy has convened ``a meeting of all heads of states of the euro-group. Not to talk about it but to actually put meat and muscles on the bones of that skeleton.''

``I can assure you, you will not be disappointed and it will be quite specific,'' she said.

Merkel said yesterday during a visit to France that Germany backs ``coherent reaction in the euro-zone to the international financial crisis.''

European benchmark stock indexes slid 22 percent last week amid an investor panic about the freeze in credit markets. The cost to protect corporate debt from default set new highs around the world and the rate banks charge each other for three-month loans climbed to record premiums over central bank benchmark rates.

Contracts on Europe's benchmark Markit iTraxx Crossover index, a measure of the cost to insure corporate bonds, soared more than 2 percentage points in the past month to 756.60 two days ago, according to JPMorgan Chase & Co.

Banks Hammered

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

U.K. policy makers took the lead in planning to purchase stakes in banks hammered by losses on assets tied to mortgages. Brown set up a 50 billion pound ($85 billion) program to invest in at least eight British lenders. 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.

It ``made sense to implement measures in Germany and other European states like the ones in the U.S. and U.K.'' Commerzbank AG Chairman Klaus-Peter Mueller said in a Bloomberg Television interview.

German Plans

A German program may allot up to 100 billion euros ($134 billion) to recapitalize private banks, state banks and insurance companies, Handelsblatt reported, 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.''

European officials last month rejected taking more concerted action. Lagarde then said she had ``decided to take no other measures'' than banning short-selling and German Finance Minister Peer Steinbrueck dismissed the need to ``adopt a comparable program'' to the U.S. program to buy distressed assets from banks.

In their Oct. 4 summit, leaders of France, Germany, Britain, Italy, Luxembourg, the ECB and European Commission stopped short of a regional rescue effort. They agreed to ease accounting rules, seek tougher financial regulations and weaken enforcement of competition and budget laws.

Speed of Crisis

The second round of Paris crisis talks in as many weekends reflects the speed at which the U.S.-led credit crunch has infected Europe's banking system, financial markets and economy. Governments this month bailed out financial companies including Fortis and Dexia SA. The ECB cut interest rates this week for the first time since 2003 and offered banks unlimited funding every week at the main refinancing rate.

Even so, Europe's credit markets remain frozen, like those elsewhere. The cost of borrowing euros for three months remains close to a record high, choking off access to cash for companies and consumers. That is pushing the 15-nation euro area toward its first recession since the single currency began trading in 1999.

``We have to reduce the cost of borrowing in Europe and there is room for that,'' Corrado Passera, chief executive officer at Intesa Sanpaolo SpA, Italy's second-biggest bank, said yesterday.

Brown's government has also proposed guaranteeing loans between banks to thaw money markets. The G-7 refrained from endorsing the approach two days ago. The U.K. leader may renew his push today. The U.K. plans to recapitalize its biggest banks including Barclays Plc and provide 250 billion pounds of bank loan guarantees.

To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net Sandrine Rastello in Washington at srastello@bloomberg.net;