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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Nations close ranks on crisis

Actions to protect banks worldwide

French President Nicolas Sarkozy delivers a speech following a crisis summit at the Élysée Palace in Paris on Sunday. At left is E.U. Commission president Jose-Manuel Barroso.  (Associated Press / The Spokesman-Review)
By Edward Cody and Anthony Faiola Washington Post

PARIS – Governments around the world took unprecedented steps Sunday to rescue the global financial system, with major European powers unveiling a united plan to prevent further bank failures while Australia and New Zealand moved to calm panicked investors by guaranteeing deposits before stock markets opened in Asia.

With the newly decisive moves, other major nations are catching up to or surpassing the United States in sculpting a response to the crisis, which crashed stock markets last week and threatens a broader collapse of the world’s interconnected banking system. Although Congress has given the Treasury Department wide authority to intervene in financial markets with a $700 billion bailout plan, officials are still deciding how best to execute it.

Assistant Treasury Secretary Neel Kashkari, who has been tapped to orchestrate the bailout, is scheduled to speak about the rescue package this morning in Washington.

In addition to Australia and New Zealand, the United Arab Emirates guaranteed all deposits with local banks Sunday, including the country’s two largest lenders, Emirates NBD and National Bank of Abu Dhabi, to ensure that credit continues to flow. This follows moves by some European countries, including Ireland and Germany, to remove or raise the limit on deposit insurance. The United States also increased guarantees for bank deposits from $100,000 to $250,000.

In Europe, where dissent over how to handle the crisis has added fuel to investor panic, leaders presented a unified response for the first time. At an emergency summit of the 15 countries that use the euro, the continent’s major economic powers agreed Sunday to offer government guarantees for troubled banks trying to raise funds and pledged that public money would be used aggressively to make sure no European bank fails. Europe’s vow to temporarily guarantee bank debt – a measure aimed at restoring flows of credit between financial institutions afraid to lend to one another in the current climate – goes beyond what U.S. officials have promised. The euro jumped 1.1 percent against the dollar in Asian trading late Sunday.

In a show of unity, British Prime Minister Gordon Brown joined leaders here for part of their meeting even though his country has not adopted the euro. Brown planned to announce today an $86 billion package of credit guarantees and bank-recap- italization plans that many call a partial nationalization of the British financial system. In recent days, the U.S. Treasury has also shifted toward a plan to have the government infuse capital in exchange for part-ownership.

The Sunday Times reported Brown’s package would include the government taking a majority share in the Royal Bank of Scotland and Halifax Bank of Scotland, two of Britain’s largest banks.

Officials in Paris said the Europe-wide plan adopted by the 15 euro countries was inspired by British measures, suggesting that Europeans were also ready to buy into troubled banks heavily to prevent failures.

“This is indeed a common action that we are taking,” French President Nicolas Sarkozy, who holds the European Union’s rotating presidency, said in announcing the accord at the Élysée Palace.

The agreement was only a framework – “principles and orientations,” according to Jean-Claude Trichet, head of the European Central Bank – and each government planned to take specific steps on a national level, according to its own interpretation of what should be done to bolster its banks, Sarkozy said. The outcome was similar to an agreement reached Saturday in Washington by finance ministers of the Group of Seven industrial nations.

Sarkozy also called a special meeting of his government for this morning to outline his country’s plans.

German Chancellor Angela Merkel, Italian Prime Minister Silvio Berlusconi and others among the 15 government leaders made similar plans for their own rescue measures, with Sunday’s accord providing only a framework or list of suggestions.

The degree of coordination among European governments has been closely followed since the financial crisis exploded in Europe three weeks ago. The ideology of European unity has been planted firmly across the continent, leading many in the public to expect joint action in times of crisis. In addition, many troubled banks work across borders, making cooperation a necessity.

Economists have suggested that the most urgent need is to get credit flowing again, the main goal of the promise of guarantees for new credit issues. Banks have become afraid to lend to other banks, they said, as well as to businesses and consumers. The credit freeze has started to slow down the real economy and raised the specter of increased unemployment and flat growth rates across Europe, officials warned.

Merkel said the main goal of Sunday’s agreement was to jolt Europe’s financial markets back into action, supplying confidence that banks would not be allowed to fail and that adequate funds would be made available to renew more normal lending patterns.

“It will allow markets to start functioning again,” she said. “That was our aim. It is a strong message to the market.”

But a similar message issued by the leaders of France, Germany, Italy and Britain on Oct. 4 failed to do the job. It was followed by a week of panic declines in stock markets across the continent, pushing leaders into the more aggressive measures suggested in Sunday’s communique.

“I want to say to our fellow citizens, in all the European countries, that they can – that they must – have confidence,” Sarkozy declared.

Dominique Strauss-Kahn, managing director of the International Monetary Fund, lauded the European agreement in comments ahead of the fund’s annual meeting with the World Bank on Sunday in Washington.

“Coordinated action is now taking place,” he said, adding that a unified European position is “what was missing” in a unified global response to the crisis. But he added that although he was “confident” investors would respond well when markets opened in Asia. (In trading early today, Hong Kong’s Hang Seng index and South Korea’s Kospi index were up. Japan’s Nikkei index was closed for a holiday.)

Although the crisis has been most concentrated in the United States, Europe and Japan, Strauss-Kahn and World Bank President Robert Zoellick cautioned that “the number of countries asking for support in the last two weeks is incredibly increasing.”

An IMF team has been dispatched to Iceland, where the banking system and currency are in meltdown. Analysts said hard-hit countries in Eastern Europe might be next.

The World Bank additionally announced plans to explore the creation of a fund that could recapitalize banks in developing countries that lack the fiscal ability to defend against the crisis.