Nations from Europe to Australia rushed out plans on Sunday to shore up their banks, trying to halt a markets crash with pledges to back lending, buy stakes in financial institutions and take other emergency steps.
European leaders meeting in Paris said their line of attack would help halt the chaos that has frozen credit markets, the lifeblood of the financial system, redrawn the world's financial industry and threatened a global recession.
“I believe that we will see over the coming few days worldwide action that will make people see that confidence in the banking system can be restored,” British Prime Minister Gordon Brown told reporters.”
In Washington, the United States worked on ways to buy stakes in struggling banks and other financial firms, something unthinkable until recently for the world's largest economy.
The US Standard & Poor's 500 index plunged more than 18% last week, its worst-ever weekly fall. European stocks fell 22% and Tokyo's Nikkei crashed 24%.
Markets gave an initial cheer to the moves to check the slump, with US stock index futures rising more than 3% on Sunday evening, a sign the market could open up on Monday.
New Zealand's dollar was stronger. German stocks rose 5% in off-exchange trading with big jumps in bank stocks.
“They're stepping up to the plate with all their fire power. It is literally a financial, economic call to arms,” said Peter Kenny, managing director of Knight Equity Markets in Jersey City, New Jersey.
“It is not going to be overnight but it is going to help a lot. It is going to take the edge of panic off market psychology,” he said.
The plan backed by prime ministers and presidents from the 15 countries that share the euro currency included state guarantees for new medium-term bank debt and state injections of capital into banks, adding to help from the ECB to unfreeze commercial paper markets, which would provide companies with vital access to funding and help stave off an economic slump.
“The steps taken in Europe are very positive. European governments in the last 72 hours got religion and realized they have a serious problem to address,” billionaire investor George Soros told reporters.
Details of how governments would buy stakes in banks are due to emerge during the week, starting with France, Germany and Italy on Monday.
“This is not a gift to banks but to help them function,” French President Nicolas Sarkozy said, mindful of the public opinion backlash in the United States when Washington pushed through a $700 billion taxpayer-funded rescue plan for US banks stuck with unsellable debt tied to the housing slump.
Portugal said it will offer a financing line worth €20 billion ($27.45 billion) to guarantee the liquidity of its banks.
The Norwegian government announced a plan to provide $57 billion in liquidity for commercial banks.
Australia and New Zealand said they were working together to offer blanket bank deposit guarantees.
Gulf Arab states also took steps to boost confidence in the financial system, including a cut by Saudi Arabia of its benchmark repo rate and a vow by the United Arab Emirates to protect national banks and guarantee deposits.
The Paris meeting was hastily arranged by Sarkozy on the heels of a meeting in Washington of finance officials from the G7 rich nations that offered no concrete, collective action but promised to do whatever was needed to unfreeze credit markets.
In a sign of how the chaos has hit the rest of the economy, Chrysler LLC and General Motors Corp have been in talks on a merger deal to combine the No. 1 and No. 3 American automakers, which are struggling to cut costs and shore up cash, according to three people familiar with the matter.
And General Electric, another icon of US industry, considered turning itself into a bank holding company, a move that would give it access to government lending channels, sources familiar with the company's thinking said on Friday.
Britain's Brown - whose country does not use the euro - was invited to Paris because the euro zone wanted to replicate something like the rescue plan announced in London last week.
That plan makes available Ł50 billion ($86 billion) of taxpayers' money for injection into Britain's banks and, crucially, calls for underwriting interbank lending.
There was no explicit reference to state guarantees for bank-to-bank lending in Sunday's euro zone leaders statement.
But Marco Annunziata, an economist with Italian bank Unicredit, said plans for bank funding and recapitalization addressed fears of counterparty risk that has shriveled the bank-to-bank lending vital for markets.
Britain could announce early on Monday it will pump over Ł40 billion ($69 billion) into major banks and take big stakes in them, people familiar with the matter said Sunday. (Reuters)