Euro nations to guarantee bank refinancing

10/12/2008

PARIS Nations in Europe s single-currency zone agreed Sunday to temporarily guarantee bank refinancing and pledged to prevent banks failing as part of a raft of emergency measures designed to get credit flowing again.

It was Europe s most unified response so far to the global financial crisis and addresses a key part of the problem: banks reluctance to lend to each other. That has helped fuel the crisis that has pulled down some of Wall Street s most storied names and is threatening the core of the U.S. and European economies.

After the Dow Jones industrial average ended its worst week in history, plummeting more than 18 percent last week, world leaders scrambled all weekend for a way to unblock money markets before they open Monday.

At an emergency summit of leaders of the 15 euro-zone countries in Paris on Sunday, European governments agreed to guarantee new bank debt until the end of 2009, allowed governments to help banks by buying preferred shares, and vowed to rescue important failing banks through emergency recapitalizion.

But it stopped short of a one-size-fits-all solution: It s up to individual governments to announce how they will implement the measures.

The plan follows Britain s 50 billion-pound ($88 billion) plan to partly nationalize major banks and promised to guarantee a further 250 billion pounds ($438 billion) of loans to shore up the banking sector.

But there was no sum given on how much the EU measures would cost, and summit host French President Nicolas Sarkozy said each country would decide how much it would spend.

Sarkozy said the measures which also include new accounting rules for banks will be enacted without delay in the 15 countries using the euro.

On Monday, the governments of Italy, Germany, France and others will present their individual ways of implementing the measures. The rest of the 27-member EU will have a chance to sign up to the measures when the countries meet Wednesday.

Highlights of the plan include:

• DEBT GUARANTEES: Governments will make it easier for banks to raise new financing by putting their guarantee behind the banks issuance of new medium-term debt. The government guarantees help to banks by giving buyers of their debt greater confidence that it will eventually be repaid. These guarantees will be available for all financial institutions operating in EU member states and will be valid until Dec. 31, 2009.

• RECAPITALIZING BANKS: Governments pledged to rescue distressed banks through recapitalization and other appropriate means. Any bank saved in this way will be subject to an appropriate restructuring plan, the governments said a clear hint of more management shake-ups like the one that saw the ouster of top executives of French-Belgian lender Dexia SA after the French, Belgian, and Luxembourg governments gave it a 6.4 billion euros ($8.79 billion) cash injection earlier this month.

• GOVERNMENT OWNERSHIP: Governments also pledged to support banks and other financial institutions by buying preferred shares in them in effect, supplying the banks with new capital in exchange for getting partial ownership stakes. Banks that accept government money would have to accept additional restrictions, the governments said, so that they don t get an unfair competitive advantage over banks that don t receive injections of government cash.

• ACCOUNTING RULES: Governments will urge regulators to relax so-called mark-to-market accounting rules. These are requirements that securities must be valued at their current price, rather than the purchase price or the price they might fetch later. Governments said under the current exceptional circumstances, these rules were no longer appropriate. Banks will be allowed to value assets based on their risk of default, rather than their current market price, which in the present environment is often much lower.