Paulson, Trichet Hope Markets Will Reward Initiatives

By Simon Kennedy

Oct. 13 (Bloomberg) -- Leaders of the world's richest nations are holding their breath in hopes that markets will endorse their latest effort to spend taxpayer cash on saving banks from collapse.

European governments will today outline just how they will carry out pledges to guarantee new bank debt and use public funds to keep troubled banks afloat. The U.S. Treasury will flesh out its proposal to buy stakes in financial firms, and Britain may go as far as underwriting stock sales by four lenders.

``People have been looking for leadership and finally they are getting it,'' billionaire investor George Soros told reporters in Washington yesterday. ``We're in a full-fledged panic, and who knows how people behave in a panic?''

Treasury Secretary Henry Paulson, European Central Bank President Jean-Claude Trichet and their colleagues are betting that logic, rather than the fear that sent stock markets tumbling last week, will govern investors' reactions. The risk is that the lack of a single, global plan to buttress banks prolongs the money-market freeze that's choking households' and companies' access to credit.

The Dow Jones Euro Stoxx 50 Index, a benchmark share index for the euro region, jumped 6.4 percent at 11.00 a.m. Frankfurt time and the euro rose the most in three weeks against the dollar.

`Bold Action Plan'

The U.S. Treasury's official in charge of implementing the $700 billion financial-rescue program approved by Congress, Neel Kashkari, speaks at 8 a.m. in Washington. Paulson said three days ago he wants to implement his new plan to buy stocks in a ``broad array'' of companies as soon as he can.

``We have a bold action plan,'' Mohamed El-Erian, co-chief executive officer of Pacific Investment Management Co., told Bloomberg Television in Washington on Oct. 11. ``They must now act fast with overwhelming force.''

The Federal Reserve said today the world's largest central banks including the ECB, the Bank of England and the Swiss National Bank will offer banks unlimited dollar funds in an effort to unlock money markets. The Bank of Japan will consider ``similar measures,'' Washington-based Fed said on its Web site.

British officials announced yesterday the government will take majority stakes in Royal Bank of Scotland Group Plc and HBOS Plc. The Sunday Times reported yesterday that the U.K. may today unveil details on underwriting share sales of as much as 35 billion pounds ($60 billion) in four of the nation's banks.

Prevent Lehman Repeat

Countries are individually implementing the commitments they made at a meeting of finance ministers from the Group of Seven nations on Oct. 10 and yesterday's summit of European leaders. After the G-7 talks, officials vowed to take ``urgent and exceptional action,'' telling banks they would have access to cash and be able to tap public funds for capital.

The goal is to prevent another failure the size of Lehman Brothers Holdings Inc., whose Sept. 15 demise spooked banks into halting loans to each other. The pledges may provide some relief for banks such as Morgan Stanley and Milan-based Unicredit SpA, whose stocks have tumbled as investors questioned their health.

``They're saying `no more Lehmans','' said Raghuram Rajan, a University of Chicago professor and former chief economist at the International Monetary Fund. ``The test is whether they can stop the panic.''

Recapitalizing Banks

Europe's leaders yesterday agreed to guarantee until 2009 bank debt issues with maturities of up to five years, permit governments to buy shares in banks and commit to recapitalizing major banks in trouble. The accord reversed a failure earlier this month to agree on a united front.

``None of our countries acting alone could end this crisis,'' French President Nicolas Sarkozy said in Paris. He and fellow leaders will today announce their own national measures.

Smaller economies also stepped up their response to the turmoil yesterday. Norway will offer commercial banks as much as $55 billion in government bonds in exchange for mortgage debt, while the United Arab Emirates, Australia and New Zealand guaranteed bank deposits.

The flood of new initiatives is being unleashed after markets proved impervious to those adopted last week. Central banks executed emergency interest-rate cuts and pumped more cash into their banking systems, the Fed said it would buy commercial paper, and European governments bailed out banks.

Lack of Coordination

Despite their unprecedented nature, Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, said the actions appeared disjointed and short on ambition with Germany still refusing to accept there was a problem. ``There was a complete lack of global coordination,'' he said.

With investors worried that governments were chasing events rather than shaping them, the MSCI World Index of equities in 23 developed countries slid 20 percent last week, the most since records began in 1970. Banks refused to lend to each other and propelled borrowing costs higher, threatening to tip the world into its worst recession since the early 1980s.

Policy makers expressed confidence that investors will ultimately recognize the scale of their initiatives. ``We have taken a lot of actions,'' Trichet said in Washington on Oct. 10. ``My experience of markets is that it always takes a little time to capture the elements,'' of decisions taken, he said.

If he's wrong and the conflagration worsens, central banks and governments may be forced to act even more aggressively to avoid a prolonged slump.

``There is a real risk that the impact of the current unprecedented policy momentum on investor confidence will be lost and -- with billions of public sector funds already committed -- policy will have to start again from scratch,'' said Lena Komileva, a London-based economist at Tullett Prebon Plc, the second-biggest broker of transactions between banks.

For French Finance Minister Christine Lagarde, her days as a synchronized swimmer are proving apt for combating the credit crunch. In both, ``you have to hold your breath and for long periods of time,'' she said in Washington.

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