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Britain and EU buying into banks to save them
2008-10-13
PARIS - British and European leaders took unprecedented steps here late Sunday to try to halt a galloping financial crisis in its tracks, announcing aggressive action to take big stakes in banks and guarantee lending between banks. European Union members announced they planned to guarantee loans between banks, called inter-bank lending, for up to five years. And they intend to allow member countries to take equity stakes worth billions of dollars in troubled financial institutions. The leaders of European nations presented their plan as "tool kit" that each country could decide how best to put to use. France , Germany and Italy are all expected to adopt the plan formally on Monday morning. "This is a worldwide crisis and, rather than tearing Europe apart, it has in fact brought us closer together," Sarkozy said. "This is no easy task." The French president said legislation is required in France and he expected to enact changes by week's end. As in the United States , the rescue of banks is hardly a popular notion, and Sarkozy echoed statements of recent weeks made by President Bush and others. "We are not handing out gifts to banks," Sarkzozy said. "We are enabling banks to operate, because our economy depends on it." The action represents a bold move as markets reopen following what in many nations across the globe was the worst week on stock exchanges since the Great Depression. The hasty emergency action is also EU leaders' first such coordinated aggressive move since they adopted a common currency, the Euro, now used by 15 nations. British Prime Minister Gordon Brown , himself a former finance minister, informed his European counterparts that on Monday morning Britain would be taking large equity stakes in at least four banks, according to the Times of London . The idea is to prevent their failure and to shore up confidence in an increasingly fragile banking sector by injecting $55 billion or more into the shaky institutions. After meeting with Sarkozy, Brown voiced confidence that the financial markets would react positively to the plans. "I believe that in the next few days confidence in the banking system will be restored," said Brown. According to the Times of London , the British government intends to become the leading shareholder in the Royal Bank of Scotland , or RBS, and the Halifax Bank of Scotland . The British government would take smaller positions in Lloyds and Barclay's, two of the most prestigious English banks. Brown broke the news to fellow leaders at an emergency summit in Paris of members of the European Union . The EU failed to reach a consensus response a week earlier, triggering continent-wide panic, and labored Sunday to reach a tentative agreement on a French and German plan to guarantee loans between banks for periods as long as five years. This move aims to thaw the credit markets, which have frozen up as banks hoard what little capital they have and refuse to lend to each other or even brand-name corporations. The European Central Bank and the U.S. Federal Reserve have worked furiously in recent months to provide emergency short-term loans to banks to prevent a complete halt to inter-bank lending. But these efforts have met with limited success as banks continue to lend to each other with only very high rates, meaning they aren't confident in each other. The European and British approach differs greatly from the controversial $700 billion rescue package approved with great difficulty last month by the U.S. Congress . That plan, pushed by Treasury Secretary Henry Paulson , sought to use taxpayer money to purchase distressed assets from banks to help boost their balance sheets. Most of these assets would be mortgage bonds at the root of the widening financial crisis. Although the Paulson plan is called the Troubled Asset Relief Program, or TARP, Paulson said late Friday that he was also looking to follow Britain's lead in injecting money into troubled banks. Paulson and colleagues have said virtually nothing about how they would do this. The Treasury official recently tapped to head the bank rescue effort, Neel Kashkari, is slated to give his first speech on the matter Monday morning. Among the questions is how Treasury might take a stake in U.S. banks, or even which ones. One frequently rumored to be at the front of the line is Morgan Stanley . It was providing advice to Treasury until late last week when it fell victim to waning confidence and saw its share prices plunge 60 percent. Morgan, along with Goldman Sachs , the only investment banks left standing after a turbulent summer, last month changed their status to bank holding companies. That makes them subject to the same regulation as commercial banks and, presumably, eligible for government cash injections to prevent their collapse. In a sign of how global the problem has become, the government of Norway announced Sunday it would lend $55 billion to Norwegian commercial banks, taking distressed mortgage assets as collateral for periods up to three years. The government will issue bonds to cover the cost of lending to the banks. As in Europe and the United States , Norway saw home prices soar and is now suffering under a painful price correction. In another development late Sunday in Europe , Sarkozy said the European leaders have asked the United States to convene a global conference to discuss ways of rebuilding the tattered international financial system. A day earlier in Washington , leaders of the 20 most industrialized nations, called the Group of 20, issued a statement on the sidelines of a meeting of the International Monetary Fund . They echoed statements by the U.S. Treasury and European nations, committing themselves to "using all the economic and financial tools to assure the stability and well functioning of financial markets. " They also committed to communicating their actions clearly "so that the action of one country does not come at the expense of others or the stability of the system as a whole." Over the past week, there has been a rise in finger pointing as Ireland and Germany moved to protect deposits, leading other nations to see depositors withdraw money to put in banks that had a complete guarantee. In other places like Norway , the coordinated interest rate cut by the Federal Reserve and five other central banks left some countries with a run by depositors who wondered why their country did not step in, too. Nissenbaum reported from Paris , Hall from Washington . Norway's announcement is here: http://www.regjeringen.no/en/dep/smk/Press-Center/Press-releases/2008/350-billion-kroner-government-bond-swap-.html?id=532111 To ask a question about this story or any economic question, go to McClatchy's economy Q&A MORE FROM MCCLATCHY In latest bold step, Treasury will buy bank stakes Private sector loans, not Fannie and Freddie, triggered crisis Along a N.C. highway, sagging economy meets politics Khall(at)mcclatchydc.com 11-12-09 fg-
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