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European leaders agree credit crisis battleplan

Posted October 13, 2008 06:04:00
Updated October 13, 2008 09:26:00

European leaders meeting in Paris have agreed on a plan to jointly confront the international financial crisis and have called for a joint summit with the US to reform the global finance system.

French President Nicholas Sarkozy says the 15 countries of the Eurozone have pledged that no major financial institution will be allowed to collapse.

The governments of the Eurozone will provide a public guarantee for refinancing operations for the banks.

"This temporary measure, limited to December 31, 2009, will be paid for at market conditions," he said.

"We are not giving presents to the banks . We are enabling them to operate because our economies depend on it."

Mr Sarkozy said the European Union would ask the United States to jointly organise an international summit to discuss the issue.

He said Europe must now join the United States and other powers to address the root causes of the banking crisis that has seriously rattled stock markets.

"We must convince our American friends of the necessity of an international summit to review the international financial system," he said.

International Monetary Fund head Dominique Strauss-Kahn welcomed the decision.

"Nearly all advanced countries are now covered and the ... Eurozone provisions may be extended eventually to all of Europe," he said.

The reluctance of banks to lend to one another has been a key problem of the financial crisis sweeping the globe.

As the leaders discussed the draft, Belgian Finance Minister Didier Reynders briefed reporters that the Eurozone countries should have until Wednesday to decide how much each will set aside.

"What we need now is for each country to fix the sum that it wants to put aside. This should happen by Wednesday," Mr Reynders said.

On Wednesday, all 27 European Union leaders will meet in Brussels.

The leaders were also expected also commit themselves to preventing any bank collapse and would step in to recapitalise failing institutions.

"We confirm today our commitment to act together in a decisive and comprehensive way in order to restore confidence and proper functioning of the financial system," stated a copy of the draft statement issued by the meeting.

"Governments remain committed to avoid any failure of systemically relevant institutions, through appropriate means including recapitalisation."

Before joining his 14 Eurozone colleagues, Mr Sarkozy held bilateral talks with British Prime Minister Gordon Brown to talk about his plans to partially nationalise some of Britain's banks.

After briefing the other leaders, Mr Brown said he expected confidence to be restored to the markets in a matter of days.

"I believe that in the next few days confidence in the banking system will be restored," Mr Brown said.

"The decisions we take over the next few days will affect us for the years ahead."

Financial markets across the world suffered massive losses throughout last week when all efforts to restore confidence appeared to fail.

Mr Brown believes that confidence can only be restored if governments follow his lead in providing funds to not only prop up individual banks, but to free up loans between institutions that keep capital markets moving.

Upon entering the talks, German Chancellor Angela Merkel said the summit would send a "very important signal" to calm down the markets.

Mr Sarkozy confirmed there would be an emergency cabinet meeting later today to examine a plan to guarantee interbank loans, followed by an address by the President to the nation in which he would "announce a number of measures."

Lawmakers said a law on guaranteeing French banks would go before parliament this week.

And in Germany, Europe's biggest economy, press reports said that Ms Merkel's government would announce after the summit a rescue package worth several hundred billion euros for its banks.

Berlin is expected to guarantee interbank loans with between 300 and 400 billion euros ($614 billion to $819 billion) and to provide banks with fresh capital in exchange for shares in the banks, as in the British plan.

Portugal's finance minister also announced that his government was offering a 20-billion-euro state guarantee for banks headquartered in that country.

-ABC/AFP

Tags: business-economics-and-finance, industry, banking, world-politics, international-financial-crisis, france, european-union

Comments (13)

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• Lament:

  13 Oct 2008 9:02:30am

  The quasi nationalisation of banks may look good today; I wonder where we will be and what we will be thinking in another ten years?
  
  Financial innovation has achieved some remarkable ends in creating liquidity in the markets, in extremis it has created the current disaster perhaps these measures will tone down the gingho spirit and make bankers think of the social consequences rather than just the profits... the obscene profits which they have been making for years.
  
  At the real bottom line banking is as much a service to society as it is a business; it should be a facilitator of the movement of investments as it once was.
  
  We should always remember that banks do not make anything; they do not produce anything, they merely facilitate the efforts of others.
  

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  • Dane:

    13 Oct 2008 9:41:12am

    "and make bankers think of the social consequences rather than just the profits"
    
    Wishful thinking
    
    Nationalising banks has its advantages, I for one would much rather be a member of a bank that was state owned, less chance of going bust plus I dont like the fact that before I get my pay at the end of the week, they gamble it on the stock market before I get to see it.
    
    Stock markets today are nothing more than glorified gambling casino's and private banks amongst others are gambling addicts.

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  • safds:

    13 Oct 2008 10:47:06am

    "bankers think of the social consequences rather than just the profits"
    
    Banks (like most businesses) only think of the social consequences of their actions if it affects their bottom line.

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• Moosa:

  13 Oct 2008 9:30:46am

  I always wonder why do they have to 'save' the banks? Why can't they go one step ahead and 'save' the borrowers by writing-off the debts of the borrowers. Because I still see banks profiting from the payouts, executives and their bosses taking home 6 figure bonuses when an ordinary borrower struggles to pay their basic 5 figure debt. This is rediculous.

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• Glenn:

  13 Oct 2008 9:45:38am

  Reminds me of the movie Titanic where the selfish climb over children to save themselves.

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  • James A:

    13 Oct 2008 9:49:42am

    Actually all of this reminds me of "A Conflict of Interest", the Yes Prime Minister episode.

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• Bootstraps:

  13 Oct 2008 10:00:19am

  There are indications from the USA that some letters of credit are not been honoured for shipping imports of products including food. Shipping hang ups of essentials is likely to cause a gap in the supply pipeline and if this isn't rectified promptly they could see some huge price increases in food over there. As a layman I don't have a clue if this is happening to us in Australia? There's talk of a "New World" finance structure, this is likely to see the US$ take a dive.

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• director:

  13 Oct 2008 10:04:15am

  What a load of rubbish.
  
  Bank (and any company) directors have an obligation under the law to do their best (make the most money) for the company they work for. They do not have any obligation to society or "the people". They just obey the law and make money for their share holders. If there are other companies making more money then they are obliged to copy them and make money. If they do not make the maximum amount of money (morally or not but) then they could go to jail or be sued. So the system and the law is designed to make money in the most effective and fast way. It also works on quarterly reports so the directors of most companies are obliged to report better profits every 3 months.
  
  So it is no wonder that the average bank director was into loans to people how could not pay and had no assets (NINJAs). Then supa (401ks) funds brought them as "investments" and ratings agencies said they where good "safe" investments. Then despite these assets paying no income to the investors, accounting practice counts these assets as assets and not donations or liabilities. All of these people looked at them to show a profit at 3-6 months and they did (on paper). But once the low rate loans reverted to normal loans then the borrowers (people) could not pay and the whole thing collapses. (note: there are 1.4 million more of these loans due to revert in the next 6-12 months)
  
  Then you consider that banks use these "assets" to borrow 16 times their face value in more money and lend that out to more NINJAs, you can understand why when it went bad it went 16 times as bad as the value of the original loans and then some more.
  
  So greed (in law), plus short term view, plus no US regulation, plus creative accounting practice means we loose our jobs and our supa.
  
  

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• Ivan:

  13 Oct 2008 10:10:25am

  What is needed (well ONE thing) is a 2-year moratorium on debt.
  
  Fix the prices of assets NOW, and abolish - for 2 years - all interest on debt.
  
  Insist on "Principal Only" repayments to maintain cash flows, and stop foreclosures and stop the bankrupting of defaulters who are unable to continue to pay compounding interest.
  
  With the interest component removed, people might actually speed up the rate of debt reduction, and become enthusiastic about their future again.
  
  I feel this would do much to restore hope and confidence in the system, and give everyone - mortgagee and mortgager - some breathing space.
  
  This would also allow people to pay down the principal of their loans, and regain some semblance of equity in their liabilities.
  
  Perhaps this is too simplistic - however - from the point of view of someone with a mortgage or other loan, it would certainly stop their thinking of letting it all go.

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  • confused:

    13 Oct 2008 10:39:50am

    but ivan how is the bank or other lending institution supposed to pay all their overheads including their staff? if there is no interst there is no profit and no money to keep the business afloat, your plan would destroy all thes institutions entirely.

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  • Brad:

    13 Oct 2008 10:44:06am

    In this climate the banks are biting the hands that feed them with foreclosures. It will leave them holding houses they can't sell because nobody can afford to buy because banks are reluctant to lend in case the loans aren't repaid. They are better off extending mortgages by 5 years, keeping people in their homes and living off reduced repayments. A reduced repayment is better than no repayment on an asset the bank can't sell.

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• Brad:

  13 Oct 2008 10:15:19am

  It's time to seriously question the whole "markets are always right" argument of free market economists. Markets cannot be right when they pay multi million bonuses to executives who gamble with our savings and lose. There needs to be a balance between free market forces in the interest of business and regulation in the public interest.

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• wakita:

  13 Oct 2008 10:39:36am

  Our current financial crisis is another sign of how the whole world has become completely interdependent in our economies, as well the environment and information flow with the WWW (and health issues also eg potential for pandemic influenza). We can no longer cocoon ourselves and think "she'll be right mate!"
  
  We need strong, well considered international regulations on money markets (as on other issues such as the environment) and even the consideration of one currency for the world to prevent the speculation that can drive currency values down with the serious impacts of fueling massive inflation in some countries.
  
  At least the current crisis has forced discussion and coordinated action among leaders of all the rich countries and maybe new way of regulating the world economies will come out of this - ways that will help to protect the less developed countries as well.
  

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