Report: 300 billion euro guarantee in French bank rescue (1st Lead)

Oct 13, 2008, 10:43 GMT

Paris - One day after the euro-zone summit on the finance crisis, the French government was to present its bank rescue plan following an extraordinary cabinet meeting later Monday.

The web site of the daily Le Monde reported Monday that the proposal will include guarantees of up to 300 billion euros (408 billion dollars) to stimulate the paralyzed interbank lending system.

The guarantees will run until the end of 2009 and will cease once the interbank market has resumed functioning normally, the daily reported.

The guarantees are to run via a new mechanism that will accept from banks all manner of safe credits, such as mortgages and business loans, as collateral for capital.

The hope is that these guarantees will encourage banks to lend to each other and then make loans available to individuals and companies.

The French government is also expected to establish a new authority for state investment (SPPE) that will support the capital resources of troubled financial institutions.

Its first measure, already agreed, will be to take on 5.7 per cent of the struggling French-Belgian financial services group Dexia.

However, since French banks appear to be in better financial shape than those in Germany and Britain, it is impossible to say how much this measure will cost. French media have reported that the SPPE could control up to 30 billion euros.

The French parliament is slated to discuss the plan this week, with a vote in both houses expected by Friday.

The measures, in one form or another, were agreed late Sunday by the leaders of the 15 euro-zone nations meeting in Paris.

According to Dominique Barbet, an economist for the French bank BNP Paribas, the proposals to support interbank lending and struggling financial institutions 'look okay,' but they have probably come too late to avoid a recession.

'The problem is that no matter what measures you take you will not avoid a credit crunch,' Barbet said. 'We are heading for tough economic times.'

However, without the plan the industrial nations would have experienced a depression, he said. 'In this regard, a recession is a kind of best-case scenario.'