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Mon 13 Oct 2008 01:59 AM

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European leaders hatch aid plan for banks in crisis

Euro zone governments says it is putting in place 'concrete measures'.

European leaders hurried out plans to help banks through the worst financial crisis since the 1930s, pledging before panicky world markets reopened that any solvent institution would get public funding if needed.

"This needs concrete measures and unity - that's what we have today," French President Nicolas Sarkozy, who hosted an emergency meeting in Paris of leaders from the 15 euro zone countries plus Britain, told a news conference on Sunday.

Governments agreed commitments to provide capital for banks caught short of funds because of frozen money markets and to insure or buy into new debt issues, a summit statement said.

Keen to show markets that goverments mean business, Sarkozy said people could expect a flurry of coordinated announcements of financial details on Monday from national capitals across Europe, notably Paris, Berlin and Rome on Monday afternoon.

According to the joint statement, leaders pledged to help or directly subscribe to debt-raising by banks for periods of up to five years to complement efforts by the European Central Bank to unfreeze inter-bank lending markets.

It was not immediately clear, however, whether governments in the euro zone were planning to underwrite interbank lending, seen by many economists as vital to prevent banks refusing in turn to fulfil their fundamental role of lending to industry and consumers.

Sarkozy said the summit showed that Europe was able despite myriad national borders to respond collectively to the crisis, which spread from the United States more than a year ago but has hit fever pitch in recent weeks.

"This is not a gift to banks but to help them function," he said.

German Chancellor Angela Merkel also predicted a flurry of follow-up announcements on Monday, saying:

"We will put these measures into practice tomorrow in order to keep the economy running, to ensure the safety of our citizens' assets and to stabilise the financial system."

The root cause of the crisis was a US housing boom that went bust, and with it a market in mortgage-related debt and derivatives that turned toxic with the downturn. That marked the start of a credit squeeze a year ago that snowballed worldwide.

Officials had billed the Paris summit as a gathering where leaders would have to move beyond declarations and produce something tangible markets could believe in.

"Tonight, tomorrow morning are very critical moments," said Josef Ackermann, Deutsche Bank CEO and chairman of the Institute of International Finance, told reporters in Washington.

The American Standard & Poor's 500 index tumbled more than 18 percent last week, its worst weekly fall on record. European stocks plunged 22 percent and Tokyo's Nikkei crashed 24 percent.

Money markets, less visible to the public, are essentially on life support and dependent on regular, massive injections of emergency liquidity from central banks across the globe because banks themselves will not lend to each other as they used to.

The Paris meeting was hastily arranged by Sarkozy on the heels of a G7 summit of rich nations in Washington that offered no concrete, collective action but promised to do whatever was needed to unfreeze credit markets.

British Prime Minister Gordon Brown, whose country has not adopted the euro, was invited to Paris because the euro zone was interested in the rescue plan announced in London last week.

"I believe that we will see over a few days worldwide action that will make people see that confidence in the banking system can be restored," Brown told a news conference.

Britain's rescue plan makes available 50 billion pounds ($86 billion) of taxpayers' money for injection into its banks and, crucially, provides for underwriting interbank lending. The latter was not explicit in Sunday's agreement.

What emerged from the Paris summit, however, looked similar to the British plan in many respects.

On Saturday, media reports said Germany was readying a rescue package that could be worth up to 400 billion euros, including the injection of equity capital worth "double digit" billions into its banks and guarantees for interbank lending.

In addition to Brown and the leaders of the euro countries, the summit involved European Central Bank President Jean-claude Trichet, European Commission President Jose Manuel Barroso and Jean-Claude Juncker, Luxembourg's prime minister and chief spokesman for euro zone finance ministers.

In London meanwhile, big British banks were in talks with government officials and regulators and were likely to announce plans to recapitalise early on Monday, according to a person familiar with the matter.

The talks there were to determine how much capital each bank needs from the 50 billion pounds ($86 billion) offered by the government, said the source, who declined to be identified. (Reuters)

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