BERLIN: Governments across Europe yesterday unlocked more than one trillion euros in rescue funds for the stumbling banking sector, as world stocks soared on news of the bailout.
European leaders hammered out an agreement Sunday to plough capital into the hardest-hit banks and massively underwrite loans between financial players, with national plans styled on a British bailout adopted last week.
Germany, France, Spain, and Austria yesterday pledged a total of 1.03 trillion euros ($1.4 trillion) yesterday, with the other 11 members of the euro zone single currency bloc set to follow suit ahead of an EU summit tomorrow.
The lion’s share of the funds will be used to guarantee interbank loans, which all but dried up in the panicked month since the fall of US bank Lehman Brothers, threatening the supply of credit to the wider economy. In Germany, Chancellor Angela Merkel’s cabinet approved an 80-billion-euro package to buy bank stocks and 400 billion euros in interbank loan guarantees.
French President Nicolas Sarkozy rolled out a 40-billion-euro lifeline to recapitalize the country’s banks, and 320 billion euros to underwrite loans.
“Nothing will be spared to prevent the crisis getting any worse,” Sarkozy told journalists. “The greatest danger is not to take risks, it is to do nothing.”
Both the French and German leaders warned the rescue offers were not blank checks and that banks should prepare to face much tougher regulatory scrutiny.
Sarkozy said the state loan guarantee would be charged at commercial rates and that banks that take it up would have to sign up to “ethical” obligations including curbs on executive pay.
And Merkel called for tighter international regulation, more oversight over banks for the International Monetary Fund and an overhaul of ratings agencies to rein in “market excesses”.
In Madrid, Prime Minister Jose Luis Rodriguez Zapatero also announced a loan guarantee of up to 100 billion euros, while Portugal had already offered a 20-billion-euro guarantee.
Austrian Chancellor Alfred Gusenbauer announced Vienna would guarantee up to 85 billion euros in loans and set aside 15 billion euros for recapitalization.
And Italy’s Finance Minister Giulio Tremonti said Rome would spend “as much as necessary” to safeguard the country’s banking sector.
New storm clouds emerged as the EU said it stood ready to help Hungary’s government after its currency, the forint, slumped last week. The IMF has made a similar offer. Market authorities in Iceland, reeling from the near wipeout of its banks, postponed the reopening of the Reykjavik stock exchange until today.
But stock markets in London, Paris, Amsterdam, Milan and Frankfurt, reeling from their worst week since the crash of 1929, rebounded sharply even before details emerged of the European rescue, and Asia recorded strong gains.
In London, the government announced it was pumping 37 billion pounds (47 billion euros) into three struggling banks — Royal Bank of Scotland, HBOS and Lloyds TSB — as part of a 500-billion-pound aid package announced last week. The plan’s architect, Prime Minister Gordon Brown, called yesterday for the creation of a “new international financial architecture” to replace the Bretton Woods system created at the end of World War II.
The Bank of England, European Central Bank and Swiss National Bank also moved to free up frozen lending by providing commercial banks with unlimited amounts of dollars for up to 84 days.
Banks worldwide need dollars to finance operations, but the market on which they would normally borrow them seized up following the collapse in the US subprime mortgage market.