France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($US1.8 trillion) to guarantee bank loans and take stakes in lenders, racing to prevent the collapse of the financial system.
The announcements came after Britain took majority stakes in Royal Bank of Scotland Plc and HBOS Plc.
The coordinated steps followed a pledge on Sunday night by European leaders to bolster market confidence as the global economy slides toward recession.
The agreement among heads of the 15 countries using the euro helped trigger a rally in stocks and the euro after a market rout.
The Dow Jones Stoxx 600 Index jumped a record 10% after slumping 22% in the worst drop in its 21 year history. The euro climbed 1%.
Wall Street was up more than 11% in an explosive day of record gains. Morgan Stanley surged 87% after its deal with Mitsubishi of Japan was recast anddone.
In Germany, the Government said it would guarantee up to 400 billion euros of lending between banks and set aside 20 billion euros to cover potential losses. It will also provide as much as 80 billion euros to recapitalize banks.
In France, the Government will guarantee 320 billion euros of bank debt and set up a fund allowed to spend up to 40 billion euros to recapitalize banks.
This will be in addition to moves already taken to bail out Dexia with 6.4 billion euros of support with Belgium and Luxembourg last week and guaranteeing Dexia’s borrowings.
BNP agreed to buy 75% of the Belgian and Luxembourg assets of Fortis after the Dutch Government paid over 16 billion euros for the bank’s operations in its country.
Spain’s cabinet approved measures to guarantee up to 100 billion euros of bank debt this year and authorized the government to buy shares in banks in need of capital.
Last week, Spain was one of the countries to produce unilateral measures to shore up banks, pledging to buy up to 50 billion euros of assets.
The Austrian government will set up an 85 billion-euro clearinghouse run by the central bank to provide cash by holding illiquid bank assets as collateral. Austria also pledged to buy banking shares if and when domestic financial institutions seek to sell new stock.
The Dutch government will guarantee up to 200 billion euros of interbank loans, it said in a letter to parliament.
Italy will guarantee some bank debt and buy preferred stock in banks if necessary, but didn’t provide any figures.
Italy’s biggest bank, UniCredit announced a 6.6- billion-euro capital boost last week that included dropping the cash dividend and using shares.
Britain wasn’t part of the moves because it doesn’t use the euro. It had earlier used its own scheme to inject funds into Royal Bank of Scotland, HBOS, and Lloyds TSB.
They will get 37 billion-pound ($US64 billion) bailout from the and Royal Bank of Scotland and HBOS will cede majority control to the government; give the government seats on their boards; the right to halt dividends and power to limit executives’ bonuses. RBS CEO, Sir Fred Goodwin and HBOS CEO ANDY Hornby will step down.
Sunday’s agreement, combined with the Federal Reserve’s promise of unlimited dollar funding, helped nudge money- market rates lower.
The London interbank offered rate, or Libor, for three-month dollar loans dropped 0.07% to 4.75% today, tied for the largest drop since March 17, the British Bankers’ Association said.
The US Federal Reserve has promised that the world’s major central banks will offer financial institutions unlimited US dollar funds in an effort to ease tensions in money markets.
The European central bank, the Bank of England and the Swiss central bank will conduct dollar auctions at maturities of seven days, 28 days and 84 days at a fixed interest rate, Fed said on its Web site today. The Bank of Japan is considering "similar measures.”
It comes as the UK and eurozone start revealing the shape of the bank rescue packages.
The UK, the eurozone and countries like Australia are guaranteeing or supporting either interbank or offshore wholesale funding for banks. The Fed is also financing the US commercial paper market for corporates.
Global central banks are stepping up efforts to counter the worst financial crisis since the Great Depression. In addition to cutting borrowing costs in a coordinated intervention last week, policy makers have injected billions of dollars into global money markets to facilitate lending.
"Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets," the Fed said in its statement.
"Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction.
"Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded."
Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets.
The Fed said the ECB, the BOE and the Swiss National Bank "can provide U.S. dollar funding in quantities sufficient to meet their demand” into 2009.
"To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.
"These arrangements have been authorized through April 30, 2009. " That’s four months later than the sw
