European leaders ready bank support plan

PARIS (Reuters) - European governments are ready to help banks weather the financial crisis by guaranteeing some of their lending and other measures, according to a document being discussed by leaders trying to stem panic on markets.

Prime ministers and presidents from the 15 countries sharing the euro currency plus Britain met in Paris on Sunday to find a response to the chaos that has frozen credit markets, the lifeblood of the financial system, and sent markets crashing.

"I believe that we will see over a 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 after leaving the euro zone leaders meeting.

The leaders were racing against the clock to clinch a rescue strategy for banks battered by the worst financial crisis since the 1930s, under intense pressure to throw them a lifeline before world markets reopen.

The U.S. Standard & Poor's 500 index tumbled more than 18 percent last week, its worst weekly fall. European stocks plunged 22 percent and Tokyo's Nikkei crashed 24 percent.

Investors were waiting to see how much state money governments could mobilize to buy into banks if needed, and if they would also underwrite lending between banks, now paralyzed by fear and distrust.

The draft statement of the leaders' meeting said new measures would seek to address "specific failures in present refinancing conditions."

"With a view to complementing the actions taken by the European Central Bank in the interbank money market the governments of the euro area are ready to take proper actions in a concerted and coordinated manner to improve market functioning over long-term maturities," it said.

As well as measures to guarantee new medium-term bank debt, the draft referred to state injections of capital into banks and sought possible help from the ECB in helping to unfreeze commercial paper markets, which would provide companies with vital access to funding and help stave off an economic slump.

French President Nicolas Sarkozy told reporters earlier that the meeting would produce an "ambitious and coordinated plan" to tackle the crisis, which spread from the United States more than a year ago but hit fever pitch in recent weeks.

"If market confidence is not restored this weekend, it's game over," said Marco Annunziata, chief economist for Italian bank UniCredit, one of the many whose shares have been hurt in panic-stricken stock markets.

Money markets, less visible to the public, are essentially on life support and dependent on regular, massive injections of emergency liquidity from central banks across the globe because banks themselves will not lend to each other as they used to.

The Paris meeting was hastily arranged by Sarkozy on the heels of a G7 summit of rich nations in Washington that offered no concrete, collective action but promised to do whatever was needed to unfreeze credit markets.

NO SINGLE RESCUE POT?

Britain's Brown was invited to Paris because the euro zone wanted possibly to replicate something like the rescue plan announced in London last week.

Sarkozy and German leader Angela Merkel, who met in France on Saturday, said they had prepare3d a number of solutions to try to restore normal flows in credit markets.

A week earlier, Merkel rejected the idea of a collective European rescue fund for banks, while Sarkozy said he had not proposed one.

That would not preclude governments on Sunday saying they were ready to pay up even if they do not put all the money in one pot or surrender control of what they offer.

Before the summit, Sarkozy held a preliminary session with Brown, ECB President Jean-Claude Trichet, European Commission President Jose Manuel Barroso and Jean-Claude Juncker, Luxembourg prime minister and chief spokesman for euro zone finance ministers.

Britain's rescue plan makes available 50 billion pounds ($86 billion) of taxpayers' money for injection into its banks and, crucially, calls for underwriting interbank lending.

Big British banks were in talks with the government and regulators and were likely to announce plans to recapitalize early on Monday, according to a person familiar with the matter.

The talks there were to determine how much capital each bank needs from the 50 billion pounds, said the source, who declined to be identified.

Sarkozy said he would announce some specific French measures for the domestic banking sector on Monday.

Media reports on Saturday said Germany was readying a rescue package that could be worth up to 400 billion euros, including the injection of equity capital worth "double digit" billions into its banks and guarantees for interbank lending.

Portugal said it will offer a financing line worth 20 billion euros ($27.45 billion) to guarantee the liquidity of its banks.

Outside the EU, 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 took emergency measures to boost confidence in the financial system, including Saudi Arabia's rare cut of its benchmark repo rate and a vow by the United Arab Emirates it would protect national banks and guarantee deposits.