financial crisis

Sarkozy announces 360 billion euro plan for banking sector

Monday 13 October 2008

French President Nicolas Sarkozy on Monday announced guarantees on interbank loans of up to 320 billion euros to shore up the financial sector. Additionally, 40 billion euros would be set aside to recapitalise French banks, he said.

View our special report on the financial crisis: 'Capitalism on the brink?'

 
French President Nicolas Sarkozy unveiled the French side of a European plan to combat the financial crisis involving up to 360 billion euros in guarantees and fresh capital for the country’s banks.

Insisting on the coordinated nature of the measures, Sarkozy, who holds the rotating presidency of the European Union, said: “The time of ‘each man for himself’ policies is over.”

320 billion euro loan guarantee fund

The cornerstone of the French response to the crisis is the establishment of two public institutions, which will make funds available to troubled financial firms on a case-by-case basis.

The first institution will guarantee inter-bank loans for up to a maximum of 320 billion euros. “Money does not circulate any more”, Sarkozy remarked. “We must first restore that circulation between banks.”

Concretely, the move aims to give the banks the ability to back up the loans they give.

Sarkozy said the state guarantee would be available until the end of 2009 for loans of up to five years. To make use of them, banks will be charged a “market price” fee, he added. They will also have to sign a contract including commitments towards the financing of loans to individuals, businesses and local authorities, as well as an ethics charter.

40 billion euros to recapitalise banks

The French president announced that a separate state-owned company would be created to inject fresh capital into ailing banks. The fund will have a capacity of 40 billion euros and Sarkozy warned that applicants would have to pay to use it. Herbert said that measure should give banks the “comfort zone to lend out again”.

“The state will not let a single bank go bankrupt”, Sarkozy said. In case of serious difficulties at a financial institution, the French government will step in and replace the management. “There can be no rescue without sanctions for the mistakes made,” Sarkozy said.

The president announced that a bill will be rushed through Parliament to make sure these measures are effective by the end of the week.

Similar moves in Germany, Britain and Spain

The French president could not resist pointing out that “a united Europe did more than the United States in terms of the amounts made available”. FRANCE 24’s Business editor Douglas Herbert notes that Germany’s effort alone is close to the 700 billion dollars set aside by Washington last week.

Sarkozy spoke as heads of government across Europe were detailing their own versions of the rescue plan. Leaders of the 15 countries in the euro currency area and Britain agreed on the outline of the measures at a meeting in Paris yesterday.

Before Sarkozy gave his press conference, German Chancellor Angela Merkel detailed a 480 billion euro rescue package to save Germany’s banks from collapse. Similar to the French plan, Berlin’s package includes 80 billion euros in fresh capital and a 400 billion euro loan guarantee fund.

Britain set the tone earlier on Monday by directly injecting 37 billion pounds in three of the country’s leading banks – Royal Bank of Scotland, HBOS and Lloyds TSB. This could make the British government the largest shareholder in the three banks.

“In return for it, of course, there will be restrictions on what happens in boardroom pay, and we're also getting guarantees in relation to increased lending to businesses, as well as to mortgages,” said Finance Minister Alistair Darling.

The UK’s latest move is part of a 500 billion pound plan unveiled last week. On Monday, Prime Minister Gordon Brown said: "We must create a new international financial architecture for the global age," adding: "We must have a new Bretton Woods – building a new international financial architecture for the years ahead."

Spain, too, set aside 100 billion euros to guarantee inter-bank loan.