European Nations Unveil Crucial Bank Rescues

European nations announced massive financial rescues on Monday as governments across the continent stepped in to shield banks and restore confidence in the face of the worst financial crisis in nearly 80 years.

German Chancellor Angela Merkel presented a rescue package that will provide 400 billion euros ($543.4 billion) in bank guarantees and a further 100 billion euros in state funds to recapitalize banks.

French President Nicolas Sarkozy, who hosted a euro area summit with Britain on Sunday which agreed on the coordinated action, said France would create two funding vehicles with up to 320 billion euros to guarantee bank lending and 40 billion euros to provide capital to banks in need.

Britain, the strongest advocate of free-market capitalism in the EU, waded in with 37 billion pounds ($63.85 billion) of taxpayers' cash to bail out three major banks, in a move that could make the government their main shareholder.

The governments of Spain and Austria announced similar emergency measures to shore up their banks and stabilize their financial system, and Italy pledged "as much as necessary" to help banks but gave no overall figure.

Rome said it would guarantee new bank bonds until Dec. 31, 2009 with a duration of up to five years and reduce the minimum collateral guarantee banks need to get a loan.

The Bank of Italy will swap state bonds for bank debt of up to 40 billion euros.

Dutch news agency ANP later reported the Dutch government would also guarantee 200 billion euros in bank loans.

The drastic steps were a crucial test of investor faith in the ability of European governments to get a grip on the global financial crisis after they promised coordinated rescue packages at an emergency summit in Paris on Sunday. Initial reaction was positive.

European shares cheered the decisive action by the 15 euro zone leaders and Brown, soaring by a record 9.2 percent on Monday, more than wiping out Friday's 7.6 percent crash to a five-year low close.

Rebound Short-Lived

But elsewhere, Russia's rebound was short-lived.

Moscow's RTS exchange halted stock trading as stocks fell, shedding early gains and prompting Prime Minister Vladimir Putin to pledge that companies of strategic importance in the "real economy" would get government corporate refinancing.

Sweden, which is not in the euro zone, said it would introduce legislation soon to safeguard its financial system, but saw no need to inject capital in its banking sector.

And Iceland, hardest hit by a wave of bank failures, showed signs of softening its long-standing opposition to applying for European Union membership in hopes of anchoring the sparsely populated north Atlantic island to a pole of stability.

In a sign of the seriousness of the situation, EU president France invited European Central Bank President Jean-Claude Trichet to address leaders of the 27-nation bloc on the crisis at their regular summit on Wednesday.

Sarkozy said in an invitation letter to leaders seen by Reuters that the summit agenda had been changed to spend as much time as necessary on the financial crisis.

The EU's competition chief, Neelie Kroes, issued guidelines for bank rescues and pledged 24-hour approval for schemes that comply, but she warned governments against skewing the level playing field by favoring domestic banks.

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The guidelines said aid must be limited in scope and time, shareholders must not reap unfair benefits from taxpayers' money and the private sector should contribute to guarantee schemes.

Merkel said the financial crisis meant Europe's biggest economy would not meet previous economic growth forecasts and could miss its target of a balanced budget in 2011.

She called for the International Monetary Fund to have a stronger role in overseeing the global financial system and said a summit of the Group of Eight nations and major emerging economies next month would discuss this.

However Sarkozy said the United States remained to be convinced of the need for a meeting.

The White House issued a non-committal comment saying no decision had been made or date set but President George W. Bush was "very open" to the idea.

British Prime Minister Gordon Brown, whose decisive action during the crisis has bolstered his political standing at home, called for world leaders to come together to remake the Bretton Woods agreement for a new globalize financial system.

"Thanks to the decisions that have just been taken, the peak of the crisis is perhaps behind us," Dominique Strauss-Kahn, managing director of the International Monetary Fund, told French radio.

The interbank cost of borrowing three-month sterling and euro funds also eased in response to the bank rescue measures.

Spanish Prime Minister Jose Luis Rodriguez Zapatero, whose country has been hit by a house price crash, said the bank bailouts could dent European sovereign debt credit ratings.

Under European Union accounting rules, the cost will be added to national debt rather than budget deficits.

The European Commission acknowledged that hopes of member states' balancing their budgets in 2010 as promised last year had been overtaken by the "exceptional circumstances."

Underpinning the government plans, European central banks said they would lend as much U.S. dollar liquidity as commercial banks needed in renewed joint bid to tame money market tensions.

For weeks, European governments were divided about how to address the crisis, which reached new heights last month with the collapse of U.S. investment bank Lehman Brothers and quickly spread across the Atlantic.

"The biggest change from today relative to last week is the fact that euro zone officials seem to have come up with a template plan from which national governments can pick and choose and implement where they see necessary," said Derek Halpenny, European head of Fx research at BTM-UFJ.

"Despite prospects of a worsening economic crisis, we believe that the nationalization of parts of the banking system could be viewed as the defining moment that marked the start of the end of the financial crisis," Philip Finch, global banks analyst at UBS, said in a note to clients.

Copyright 2008 Reuters. Click for restrictions.