Governments bail out banks to avert global meltdown

LONDON (Reuters) - Governments across the world moved on Monday to shore up confidence in the tottering global financial system with a slew of bank bailouts worth hundreds of billions of dollars.

The moves were designed to stave off the world's worst financial crisis in nearly 80 years, which comes against a background of declining global economic growth to raise the threat of widespread recession.

Britain said it would spend up to 37 billion pounds ($63.95 billion) buying into top UK banks. The move will likely see the UK government becoming the biggest shareholder in Royal Bank of Scotland and lender HBOS.

The French government will also create a 40 billion euro ($54.89 billion) fund to take stakes in banks, Dow Jones Newswires said on Monday, citing a source.

Germany will launch a rescue plan including a fund to provide up to 400 billion euros ($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 Dec 31, 2009, the draft bill showed. Chancellor Angela Merkel is due to give further details of the rescue plan at 9 a.m. EDT.

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

"We need to stabilize and then rebuild," British finance minister Alistair Darling said, encapsulating the motivation behind the moves.

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, notably Paris, Berlin and Rome later on Monday.

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

In a joint announcement with the U.S. 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.

CRISIS MOVES

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 as 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.

Equity investors appeared to be comforted by the government bailouts on Monday. The pan-European FTSEurofirst was up 6.4 percent and Asian shares outside of Japan, which was closed for a holiday, gained 7 percent.

"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.

But he added: "The recovery process is likely to be very long winded and will likely take about as long as the crisis has taken thus far."

Money markets -- the heart of the credit crisis -- eased but remained tight. Three month dollar rates were some 4 percentage points higher than expectations the Federal Reserve will cut interest rates to at least 1.25 percent by January.

This implies that banks continue to demand high premia to lend to each other as does the fact that banks deposited a record 155 billion euros overnight at the European Central Bank, rather than lend to each other.

"MASSIVE" ASSAULT

What world leaders have been trying to avoid is a repeat of the situation where the likes of Lehman Brothers were allowed to go bust.

The head of the IMF said the worst of the financial crisis was possibly over, and the Fund would draw lessons from the crisis to make proposals to reform the international financial system.

IMF Managing Director Dominique Strauss-Kahn said individual states should intervene when necessary according to their own specific needs, but it was important that any intervention should be "massive."

Underlining this, three major British banks could take 37 billion pounds in government money to boost their capital, the UK Treasury said.

Royal Bank of Scotland said in a statement it will boost its capital by 20 billion pounds, including the UK government taking 5 billion pounds in preference shares and 15 billion pounds underwritten by the government.

HBOS and Lloyds TSB will also participate in the government scheme "upon successful merger," the Treasury said in a statement.

Barclays said in a separate statement it would boost its capital by more than 6.5 billion pounds but expected to do so without government help.

(Reporting by Reuters global bureaux, editing by Mike Peacock)