Europe and others bolster banks to fight crisis

PARIS (Reuters) - Countries from Europe to Australia rushed out plans on Sunday to shore up their banks, trying to stem a crash in markets by pledging to back lending, buy stakes in financial institutions and take other measures.

European leaders at an emergency summit in Paris said their line of attack would help halt the chaos that has frozen credit markets, the lifeblood of the financial system.

"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 was working on ways to buy stakes in struggling banks and other financial firms, an idea that until recently would have been anathema to the world's largest economy but which is now seen as key to riding out the crisis.

Finance officials around the world were racing to clinch a rescue strategy for banks, battered by the worst financial crisis since the 1930s, before markets reopen on Monday.

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

"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.

Analysts said Europe's plan could help check the slump and markets gave an initial cheer. The New Zealand dollar opened stronger and German stocks rose 5 percent in weekend off-exchange trading with big jumps in bank stocks.

"It's got to be a bit of a confidence-builder, said John McCarthy, vice president of foreign exchange at ING Capital Markets in New York. Still, he said it remained to be seen if the initial reaction would hold.

"At some point in time there has to be evidence that banks are lending again," he said.

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, state injections of capital into banks and 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.

"NO GIFT TO BANKS"

French President Nicolas Sarkozy said details of how governments would buy stakes in banks would be given at the national level, starting with France, Germany and Italy on Monday.

"This is not a gift to banks but to help them function," Sarkozy said, mindful of the public opinion backlash in the United States when Washington pushed through a $700 billion taxpayer-funded rescue plan for U.S. banks stuck with unsellable debt.

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 moved to boost confidence in the financial system, including Saudi Arabia's cut of its benchmark repo rate and a vow by the United Arab Emirates to protect national banks and guarantee deposits. [nLC676738]

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.

In a sign of how the chaos has hit the rest of the economy, Chrysler LLC and General Motors Corp have been in talks on a merger deal to combine the No. 1 and No. 3 American automakers, which are struggling to cut costs and shore up cash, according to three people familiar with the matter.

And General Electric, another icon of U.S. industry, considered turning itself into a bank holding company, a move that would give it access to government lending channels, sources familiar with the company's thinking said on Friday.

Britain's Brown -- whose country is not a member of the euro zone -- was invited to Paris because the euro zone wanted possibly to replicate something like the rescue plan announced in London last week.

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.

However, it was not clear if the plan backed by euro zone leaders included guarantees for bank-to-bank lending.

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

Billionaire investor George Soros predicted that the financial crisis would mean the end of a U.S.-led market system that has dominated the global economy since the 1980s.

"Globalization, America as the center of the globalized financial markets, was sucking up the savings of the world," Soros told CNN. "This is now over. The game is out. It does mean a very serious adjustment for America," added Soros.

(Reporting by Francois Murphy, Noah Barkin, Giuseppe Fonte, Anna Willard and Crispian Balmer in Paris, and James Mackenzie in Washington: Writing by William Schomberg; Editing by Tim Ahmann)