Monday, October 13, 2008

Major Economic Plans From Europe, Middle East, and Australia Announced; Germany Has Its Own Rescue Package; It's Official - Wachovia to Wells Fargo

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, and redrawn the world's financial industry.

"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.

Markets gave an initial cheer to the moves to check the slump, with U.S. 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.

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.

Portugal said it will offer a financing line worth 20 billion euros ($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.

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. Britain's plan makes available 50 billion pounds ($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 40 billion pounds ($69 billion) into major banks and take big stakes in them, people familiar with the matter said Sunday.

Germany Has Its Own Rescue Package

A German rescue package for its banks will be worth around 400 billion euros ($549 billion) and be restricted until the end of 2009, a senior official in Chancellor Angela Merkel's conservatives said on Sunday.

"This whole law we have planned will expire again on Dec. 31, 2009," Volker Kauder, parliamentary floor leader of Merkel's Christian Democrats (CDU), told state broadcaster ARD.

Kauder said the overall package would be worth "in the region of" 400 billion euros, confirming earlier reports. Part of the plan is set to include interbank guarantees, which Kauder said would likely be worth between 200-250 billion euros.

After meeting in Paris, leaders from the euro zone economies and Britain pledged on Sunday to pump public money into banks battered by the credit crisis. German coalition sources said Berlin plans to provide equity capital worth up to 100 billion euros to help its banks cope with the fallout from the crisis.

"Banks which take advantage of this state help will have to reckon with massive changes though," Kauder added. One such example of this would be restrictions imposed on executive pay, Kauder said.

German media said the cabinet planned to make a decision about the British-style package on Monday, and aimed to enact the measures as soon as possible via a fast-tracked law. "The aim is for an orderly but quick legislative process aimed at averting risks for our economy," Finance Ministry spokesman Torsten Albig said on Sunday.

Following a meeting with French President Nicolas Sarkozy on Saturday, Merkel said Germany might inject capital into its banks but was not planning to take permanent stakes in them.

According to a document circulated at the Paris summit, two key things agreed by European leaders were the commitments to provide capital and insure or directly buy into new debt issues.

Wachovia and Wells Fargo Get Rare Sunday Approval

The Federal Reserve said on Sunday it approved the takeover of Wachovia and its banking subsidiaries by Wells Fargo.

The Fed's decision formally made Wells Fargo the victor in a battle between it and Citigroup. The fight between Wells Fargo and Citigroup was acrimonious right up to the point when Citigroup finally backed out last Thursday.

It had drawn particular attention because it took place amid the frantic scramble by the U.S. government and regulators to devise ways for shoring up hard-pressed financial institutions, including through possible direct injections of capital into banks.

The Fed cited the "unusual and exigent circumstances affecting the financial markets, the weakened financial condition of Wachovia and all other facts" in its decision, saying it had shortened the usual notice period it generally gives regulators about such takeovers.

The deal could be completed in five days, the Fed said.

After Citigroup dropped out last Thursday, the Fed said it would immediately begin considering Wells Fargo's bid for Wachovia and Sunday's approval came as little surprise.

Sources: Reuters, AP

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