Europe pumping billions of dollars into banking system

LONDON -- European governments on Monday began pumping billions of dollars into their banks, putting more than $2 trillion on the line, in a coordinated effort to prop up struggling institutions, encourage lending and calm stock markets.

At a series of nearly simultaneous afternoon news conferences, European leaders detailed comparable rescue plans to infuse banks with capital if they needed it and to guarantee their debt with taxpayers money.

The pledges by Germany, Britain, France, the Netherlands Spain, Portugal and Austria total 1.7 trillion euros ($2.3 trillion). About 250 billion euros ($341 billion) of the European pledges was earmarked to be spent on recapitalizing banks by buying stakes.

The coordinated announcements were aimed at restoring confidence a banking system that has continued to bleed despite assurances the last 10 days from leaders in separate capitals that they wouldn't let their banks go under.

"The time of everyone acting alone is over," French President Nicolas Sarkozy, who heads the rotating presidency of the European Union, said in Paris.

Monday's announcements demonstrated European governments are starting to take the right steps to stave off a meltdown, says Alistair Milne, associate professor of finance at the Cass Business School at City University London.

"Shoring up the banking system with substantial public funds is absolutely necessary," says Milne, who studies financial systems and advises the Bank of England.

As part of making taxpayer money available to bail the banks out, European governments are requiring they lend to companies and mortgage holders.But Milne questions whether banks will be stingy after making five years of bad loans that led to the current crisis. "Will they lend? I'm not so sure," he says.

"United Europe has pledged more than the U.S.," Sarkozy said during a press conference after an emergency cabinet meeting. And Europe's response does dwarf the Bush administration's $700 billion rescue program.

Milne questions whether the U.S. government needed to do more to shore up U.S. banks.

The $700 billion U.S. plan to absorb banks' bad assets represents less taxpayer money that European governments are making available to ease the crisis.

"(That) may just not be enough," Milne says. "For the size of its banks, Britain has made available six or seven times as much."

European markets responded positively. Bank shares, which had been badly battered in downward trading last week, led the rise on major exchanges.

At the close, Germany's DAX was 518.14 points, or 11.4%, higher at 5,062.45, while France's CAC-40 was up 355.01 points, or 11.2%, at 3,531.50. Britain's FTSE 100 was 324.84 points, or 8.3%, higher at 4,256.90, despite some hefty falls in the banks that have accepted government help.

Earlier in the day, Britain announced that three of the country's biggest banks would take up to $63 billion from the government to improve their balance sheets.

The British government last week made $87 billion in direct aid available to banks along with additional guarantees.

The British plan served as a blueprint for what the other governments unveiled, including:

• In Berlin, German Chancellor Angela Merkel announced her cabinet had approved $136.5 million in direct taxpayer aid if banks needed it, along with $546 billion in guarantees.

• Sarkozy said the French government would set up two funds, one to provide $54.6 billion in state funding to capitalize needy banks by buying shares and $437 billion in another to provide guarantees.

• In Italy, which has the fourth biggest European economy behind Germany, Britain and France, the government said it would make more than $27 billion available.

• Austria's government said it is prepared to offer up to 85 billion euros ($114 billion) to banks in guarantees, if they need it to survive the global financial crisis. Chancellor Alfred Gusenbauer said his government is also ready to provide an additional 15 billion euros ($20 billion) in capital. Last week, Austria also decided to guarantee bank deposits up to their full value.

• The Netherlands put up 200 billion euros ($273 billion) to guarantee interbank loans.

• Portugal guaranteed 20 billion euros ($27 billion) — nearly 12% of annual GDP — to encourage Portuguese banks to lend to each other.

Meanwhile, Spain has said it would make similar guarantees. And Sweden, which isn't part of the eurozone, said it would introduce legislation to safeguard banks, but without injecting capital into them.

Also helping markets was a joint move by the U.S. Federal Reserve, the European Central Bank and the Swiss National Bank to provide unlimited short-term credit in U.S. dollars to financial institutions. The Bank of Japan said it is considering similar measures.

The coordinated action by the big economies comes amid the worst banking crisis since the 1930s Great Depression. Global credit markets have been frozen the last four weeks after the collapse of U.S. financial house Lehman Brothers. Even previously healthy banks have teetered without money to cover their debts and have witnessed their share value shrink as equity investors bailed on them last week in historically massive sell-offs.

At a morning news conference here, British Prime Minister Gordon Brown described the unprecedented move by his and other European governments as necessary to restore confidence in what is a global crisis.

"The government cannot just leave people on their own to be buffeted about," Brown said of putting British taxpayers money into its banks. "We must, in an uncertain and unstable world, be the rock of stability upon which people can depend."

Under the government-banks agreement announced here:

• Royal Bank of Scotland Group would take $34 billion in aid. The government is to buy $8.6 billion in preferred bank shares and underwrite $25.7 billion of ordinary shares.

• HBOS and Lloyds TSB Group are to take $29.2 billion. Lloyds is the process of taking over HBOS, Britain's second-biggest mortgage lender. But the merger has been slowed amid the banking chaos and steep declined in the two banks' shares.

• Barclays announced it would boost the capital on its sheets — but without the government's help.

This could give taxpayers up to a 60% stake in the Royal Bank of Scotland and 40% in a merged Lloyds-HBOS bank, the BBC reported.

British Chancellor Alistair Darling said that under the deal, the government would pocket the shares until the crisis ends and banks have returned to health. The government, he said, had no interest in being in the banking business long term.

In return for the aid, some bank executives will step down, others will forgo bonuses and lending to companies and mortgage holders will return to levels seen last year before the current financial crisis.

Merkel and Sarkozy said similar lending guarantees and caps on bank executive pay were part of their governments' requirements for providing bailouts.