Europe leaders agree on bank rescue plan

French President Nicolas Sarkozy, second right, holds a press conference with European Central Bank President Jean-Claude Trichet, left, European Commission President Jose Manuel Barroso, second left, and Luxembourg Prime Minister Jean-Claude Juncker, right, at the European summit at Elysee Palace in Paris, France.

Nations in the euro zone will have individual rescue packages but will coordinate with one another. They vow to inject liquidity into the banking sector to ease the credit crunch.

By Achrene Sicakyuz and Sebastian Rotella, Los Angeles Times Staff Writers
October 13, 2008

PARIS -- European leaders agreed Sunday on a coordinated rescue plan to guarantee inter-bank lending, inject cash into the banking sector and take other measures to beat back the crisis caused by the global financial meltdown. At an emergency summit in Paris on Sunday evening, the leaders of the 15 nations that use the euro currency announced a Europe-wide plan to guide and coordinate packages that will be announced by national governments starting today.

The leaders pledged to work together to prop up banks whose credit activities have been all but frozen in recent days, trying to send a strong message of unity and action before financial markets open today.

The package follows a major British initiative, announced last week, to commit about $87 billion for a partial nationalization of the banking sector. On Friday, U.S. Treasury Secretary Henry M. Paulson unveiled a similar plan to take direct stakes in banks and other financial institutions using a portion of the $700-billion financial bailout package aimed at buying distressed mortgage-backed securities.

Asian stocks and U.S. index futures advanced in early trading today on news of the parallel approaches taken by the U.S. and European nations. Investors are eager to see cooperation because even if markets perceive that the situation with European banks is improving, those institutions are so closely linked to their U.S. counterparts that continued pessimism about American banks could undermine European governments' efforts.

The actions come on the heels of meetings in Washington over the weekend of leaders of the world's top economies. The so-called Group of 7 had embraced no coordinated effort to stem the global financial crisis leading into the meetings beyond jointly cutting interest rates Wednesday. Given the differences in European economies and politics, most experts had viewed a large-scale one-size-fits-all approach as impossible and perhaps even undesirable. Because few details of the programs were disclosed, just how similar the plans are was unclear Sunday night. The European leaders did not put a price tag on the bailout, saying the numbers would be announced in coming days as national governments unveiled details of their efforts. The 27 member states of the European Union -- 12 of which have not adopted the euro -- will consider the proposal at a summit Wednesday in Brussels. Sunday's meeting was the first time the heads of state in the 15 nations in the single-currency zone have met since the euro was introduced. "Instead of tearing us apart, this global crisis has strengthened the necessity of dialogue, understanding and compromise," French President Nicolas Sarkozy said Sunday. "It's not so easy. We don't have the same traditions, for some we don't share the same currency, we have different regulators. And with this crisis, in a few hours, day and night, we've had to learn and understand each other's problems and find a common solution." Governments will play a central role guided by the EU, according to a statement by the participants. States will guarantee new bank debt through the end of 2009, provide emergency recapitalization to prevent distressed banks from failing and buy preferred shares in financial institutions. European accounting rules will also be relaxed because of the "exceptional circumstances." "While acting quickly as required by circumstances, we will coordinate in providing these guarantees as significant differences in national implementation could have a counterproductive effect, creating distortions in the global banking markets," the leaders said in a joint declaration. Prime Minister Gordon Brown of Britain also attended and voiced support for the effort. "I believe that there is common ground now about what needs to be done, that it has to be comprehensive, and it has to be all countries working together to get to the bottom and solve what is a global financial problem," Brown said after a preliminary meeting with Sarkozy, who has used his hard-charging style to push for an aggressive response to the crisis because France holds the EU presidency. Britain is a major player in the EU but has retained the pound sterling rather than adopting the euro, a dissonance that is symptomatic of the tensions among member states. Sarkozy said the accord permitted the European Union to overcome one of its inherent problems: It creates a unified, concrete policy while allowing for flexibility to account for differences in economies, laws and cultures in the vast continental entity. The Europeans want to avoid the discordant image of past weeks in which at times it seemed governments were making solo decisions that undercut others and worsened their economic woes. At the same time, proposals such as creating a central European bailout fund are seen as cumbersome and unrealistic given the differences among countries. In the near future, Sarkozy said, the EU leaders will seek to persuade the U.S. government to hold a conference intended to do nothing less than "rebuild the international financial system." The European accord "gives us an advantage over our markets, which are completely deregulated at the moment," Sarkozy added. France, Germany, Italy, Austria and other countries will hold Cabinet meetings and news conferences today to present their proposals. "We are not running to save the bankers. We work for Europe, its citizens, consumers and companies," said Jean-Claude Juncker of Luxembourg, president of the Eurogroup. "I don't like that our action is presented as if we were taking money from our public accounts to save the bankers. We must solve the financial crisis to avoid other crises at other levels. Maybe the political crisis will come next because our citizens are losing confidence in our system. Therefore we have no right to fail, and we won't." The initiative seems to fit well with the political culture of Europe, in which the states are welcomed as central players in the economy in a way that, until recently, seemed strange in the U.S. The crisis has further blurred already hazy ideological differences among countries and political figures. Sarkozy is seen as a pro-American center-rightist, yet his approach has reflected the French tradition of a muscular public sector that does not hesitate to wade in to clean up messes in the market. Brown, in contrast, is nominally a leftist, yet Britain has enthusiastically embraced the aggressive, high-risk practices of U.S.-style capitalism that are widely blamed in Europe for triggering the meltdown. France and Germany, the traditional powerhouses of the EU and two of its juggernaut economies, planned to push rapidly ahead with their national economic revival campaigns today.

Sarkozy called an emergency Cabinet meeting to examine a proposed law to guarantee refinancing of French banks, according to a spokesman of the Finance Commission of the National Assembly. The law would create a mechanism allowing banks to provide longer-term loans backed by the state, officials said.

The German government, meanwhile, is expected to consider a proposal to provide as much as $300 billion to guarantee bank debt, according to media reports.

The British government is expected to release details of its first round of cash infusions early today. There were conflicting reports about how much would be doled out, but the recipient of the biggest handout is likely to be the Royal Bank of Scotland, whose shares have dropped the most of any of the major British banks. Also on the list is Lloyds TSB, whose takeover of the troubled lending giant HBOS looks increasingly in doubt.

Separately Sunday, Paulson told the World Bank, ending its annual meeting in Washington, that the United States would work to protect smaller nations by trying to ensure a steady flow of goods, services and capital to developing countries. "These countries," he said, "are likely to face a host of new pressures stemming from declines in export demand, private investment and remittances. Emerging markets too are likely to face difficulty." The secretary called it "imperative" that the rest of the world "stand ready to deploy resources to mitigate the impact of this crisis, especially on the poorest and most vulnerable." Mexican Finance Minister Agustin Carstens, head of the bank's policy-setting panel, said that the commitment to protect Third World countries by members of the World Bank was made unanimously.