Governments bail out banks

First Posted 20:59:00 10/13/2008

LONDON—Governments across the world launched multi-billion dollar bailouts on Monday to shore up tottering global banks and Britain called for a new Bretton Woods agreement to reshape the world financial system. The slew of bank bailouts worth hundreds of billions of dollars were designed to stave off the world’s worst financial crisis in nearly 80 years, accompanied by declining global economic growth and the threat of widespread recession.

“Only by global action can we fully restore the confidence that is needed and build the international financial order,” said British Prime Minister Gordon Brown.

He called on world leaders to create a new “financial architecture” to reflect the global reach of economics and banking, in much the same way that the current international economic system was set up at a conference in Bretton Woods, New Hampshire, in 1944.

In the United States, focus was on Morgan Stanley, whose share price plunged 58 percent in the last week, after Japan’s Mitsubishi UFJ Financial Group said on Monday it had invested $9 billion under revised terms, a move analysts said was likely to bolster still fragile market confidence.

Britain said it would spend up to 37 billion pounds ($63.95 billion) buying into top UK banks, making the UK government the biggest shareholder in Royal Bank of Scotland and the merged Lloyds TSB/HBOS.

France will use two entities to help banks overcome the financial crisis with one offering 300 billion euros in guarantees on interbank lending and the other a Є40 billion fund to take stakes in companies, media said.

Germany will launch a rescue plan including a fund to provide up to Є400 billion ($548.9 billion) in guarantees for banks, according to a draft bill seen by Reuters on Monday.

Bank guarantees provided by the fund will run until December 31, 2009, the draft bill showed.

And the Italian government was to meet later in the day to look at new measures for financial stability.

Japanese Finance Minister Shoichi Nakagawa, meanwhile, said his country would consider guaranteeing all bank deposits if necessary, news agency Jiji reported.

Both Democratic presidential candidate Barack Obama and Republican counterpart John McCain were also preparing to roll out plans to rescue the country from economic uncertainty and rising joblessness.

Euro zone leaders held an emergency meeting on Sunday and French President Nicolas Sarkozy said people could expect a flurry of coordinated announcements from national capitals across Europe later on Monday.

In tandem on Monday, European central banks said they would lend out as much US dollar liquidity as commercial banks need in a further bid to tame money market tensions.

In a joint announcement with the US Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank said they would meet all bids from commercial banks at a fixed interest rate.

Australia and New Zealand earlier guaranteed all bank deposits and Indonesia upped its guarantee to 2 billion rupiah ($203,000) while India pledged more liquidity to help financial markets.

Qatar launched a $5.3 billion plan to purchase shares of its listed banks. Saudi Arabia cut its lending rate on Sunday to provide liquidity to its banks and the United Arab Emirates guaranteed bank deposits.

The moves followed a weekend of crisis talks in the United States and Europe in which governments pledged to support the financial system, which has moved to the brink of collapse as it suffers from both steep losses in the credit market and a lack of trust in lending that has frozen the flow of capital.

The need for bailouts has become particularly trenchant against a background of a global economic slowdown, with many countries facing recession.

The crisis has swept across financial markets, sending many stock markets into free fall. MSCI’s main world stocks index, for example, has lost a quarter of its value since the beginning of October.

But equity investors appeared to be comforted by the government bailouts on Monday. The pan-European FTSEurofirst was up 5.2 percent and Asian shares outside of Japan, which was closed for a holiday, gained around 7 percent.

US stocks index futures pointed to similarly solid gains at the Wall Street open.

“We are arguably now near the end point in terms of the extremely violent sell off in equities and widening in spreads, said Sean Maloney, a bond strategist at Nomura.

Money markets — the heart of the credit crisis — eased but remained tight. Three-month dollar Libor fell to 4.75250 percent from 4.81875 percent on Friday.

Banks deposited a record 155 billion euros overnight at the European Central Bank, rather than lend to each other.

Authorities have been trying to avoid a repeat of the decision to allow Lehman Brothers to go bust.

The Federal Reserve gave its approval on Sunday to the takeover of Wachovia Corp by Wells Fargo & Co. (PDI)

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