As part of a coordinated international effort to stem the global financial crisis, Britain, Spain, Germany, France, and other European governments announced today massive rescue packages – totaling hundreds of billions of dollars aimed specifically at thawing the nearly frozen global money markets.
German Chancellor Angela Merkel announced on Monday an unprecedented €480-billion rescue package for Germany’s banks. The finance ministry in Europe’s biggest economy said the package included 80 billion euros in capital for battered banks and some 400 billion euros in loan guarantees.
French President Nicolas Sarkozy, who hosted a euro area summit in Paris on Sunday, announced two funding vehicles totaling €320 billion guaranteeing bank debt issued before the end of fiscal ’09 with a duration of less than five years. France has also set aside another €40 billion to recapitalize national banks.
Britain also on Monday announced its government would inject up to 37 billion pounds ($63 billion) of taxpayers’ cash into three major banks — Royal Bank of Scotland [RBS], Lloyds TSB and Halifax Bank of Scotland [HBOS], making the government their main shareholder. British Prime Minister Gordon Brown, whose immediate action during the crisis has improved his political standing at home, at a news conference said:
“This is perhaps the first government to do what I believe a large number of governments are going to do over the next few days.” [AP]
Mr. Brown also reiterated his believe for world leaders to come together to remake the Bretton Woods agreement for a new globalized financial system. The Bretton Woods conference, held in July 1944 helped draw up the post-war financial order, establishing both the International Monetary Fund [IMF] and the General Agreement on Tariffs and Trade [GATT]. President Sarkozy has also made similar demands.
The governments of Spain and Austria also announced today similar emergency measures to shore up their banks and stabilize their financial system by guaranteeing €100 billion and €129 billion respectively. Meanwhile, Italy is preparing its own package and the Berlusconi government has already approved a decree that guarantees the country’s banking system.
It has become clear that the coordinated action by the EU governments and the willingness to break with precedent and try new approaches – has made the current crisis, as the flurry of announcements suggests, more manageable while significantly improving the chances of ending the downward spiral in global markets. As result, the European stocks surged on following the weekend developments, with the FTSE 100 adding-to-tape 324 points, the Eurostoxx up more than 220 points, Germany’s DAX and France’s CAC 40 both advanced 11%, the steepest gains since the measures were created. In U.S. the Dow Jones Industrial Average posted substantial gains as well. The major average stormed back soaring a nearly inconceivable 936 points. (the Dow’s largest-ever point gain during a session).
By shoring up banks, governments are attempting not only to calm stock markets — but also to stop panic bank withdrawals by consumers and to prevent the crisis spreading to other sectors of the EU economy.
The respective rescue plans of European governments so far total a combined $2 trillion.
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