Key European governments unveil huge bank rescue deals

By Deutsche Presse-Agentur dpa Oct 13, 2008, 16:08 GMT

\'I believe that only by global action can we fully restore the confidence needed to build the international financial order,\' said Prime Minister Gordon Brown. EPA/ANDY RAIN

Key European governments on Monday unveiled unprecedented state cash injections to steady their reeling banks, and other nations were expected to follow suit in the next few days in an emergency effort to stave off recession.

As agreed Sunday at a summit in Paris, the governments are to set up state funds to buy control of the worst-hit banks and post more than 1 trillion euros (1.4 trillion dollars) in guarantees to back up a revival of interbank lending.

The German, French and British interventions, came with a crowd-pleasing condition: no more big bonuses for the wealthy executives of the banks that come looking for help.

Germany's rescue, to be legislated by the end of the week, will be the biggest, with a 70-billion-euro fund, plus extra leeway of 10 billion euros, earmarked to recapitalize as yet unidentified German banks.

Chancellor Angela Merkel said it would be accompanied by a 400-billion-euro guarantee to interbank lending.

She predicted that only a few of the deals to be guaranteed would default, so her government expected the guarantee to cost only 20 billion euros.

Her finance minister Peer Steinbrueck said the eurozone rescue was fundamentally different from the 700-billion-dollar purchase of illiquid assets from banks by the US government, but he said Berlin would see if it needed to take over bad loans as well.

In Paris, President Nicolas Sarkozy unveiled a French rescue that includes up to 320 billion euros of guarantees to restore confidence in the interbank credit market.

To recapitalize struggling financial institutions, the French government will create a 40-billion-euro authority in which the state will be the only shareholder be inject funds into solvent banks.

'The French state will not let any bank fail,' Sarkozy declared. To prevent bank failure, the state will take control of the institution and change its management, he added.

The British government had been first up with the rescue plan, announcing early Monday it would inject 37 billion pounds (65 billion dollars) into ailing banks and posting guarantees of 250 billion pounds.

'I believe that only by global action can we fully restore the confidence needed to build the international financial order,' said Prime Minister Gordon Brown.

The moves followed consultations with European Union (EU) leaders, US President George W Bush and the World Bank and International Monetary Fund (IMF) over the weekend. Britain and the 15 eurozone countries met on Sunday in Paris.

The British injections will make the British government the biggest shareholder in the Royal Bank of Scotland (RBS) and a merged Lloyds TSB and Halifax Bank of Scotland (HBOS).

Austria unveiled a similar programme. The Alpine republic is to offer up to 15 billion euros to increase its banks' capitalization and up to 85 billion euros to guarantee interbank lending.

In euro terms, the four governments' guarantees total 1.12 trillion euros in guarantees and 172 billion euros in funds.

Late in the day, Italy's government approved Monday a decree containing similar measures to shield the country's banks.

Economy Minister Giulio Tremonti said the cost of the aid could not be quantified at this stage.

Germany said the guarantees for interbank lending would be offered at a commercial rate of interest, 2 per cent, to any bank.

However the cash injections for banks on the brink of default will come with a different kind of price tag: a pay cap.

Brown said there would be no more 'incentives for irresponsibility' and that remuneration at banks rescued by public funds would be based on performance and the creation of long-term value.

German finance minister Steinbrueck said there would be no fat incentives or big severances at banks that need bailing out.

Sarkozy also vowed to do away with exorbitant severance payments to executives who have incurred unreasonable risks.

Smaller eurozone nations may announce similar packages this week. Legislatures must rush through bills to authorize the rescue. Paris and Berlin both said they hope to have legislation passed before the week is out.

Merkel said there would be a 'second building block' to the rescue: changes to international rules.

'In my view that includes strengthening the role of the International Monetary Fund (IMF) in oversight of financial institutions,' she said.

The European Commission blessed the rescue packages, setting out Monday rules that EU member states should follow. One rule is that any guarantees they offer apply to all banks on their territory.

Leading banks welcomed the moves, which follow weeks of ad-hoc action to underpin individual banks by the European governments, which had hoped the financial markets would come right all by themselves.