naked capitalism

The statement of intent by the EU today is progress but far short of a plan. However, measures by major countries are to be announced tomorrow. The statement, that each country will announce measures, may be greeted with disappointment, since there had been some hope that the summit would announce an EU program, as opposed to coordinated country-level programs.

Update 3:50 PM: More detail has been announced, and the biggest element (in terms of getting money markets functioning) is the plan to guarantee bank lending for up to five years. In theory that should help get the money markets moving, but there is no stick to accompany this rather large carrot. Banks still have the option to lean on their friendly cjunkie central bank. I’d be happier if I also saw a statement of intent to start withdrawing or cutting back on liquidity facilities, but that might be too much to absorb, particularly since the programs will vary by country.

The news story from Bloomberg was part of the original post; a New York Times story further down has more detail.

From Bloomberg

European leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under, trying to stop the financial hemorrhage and stave off a recession.

At a summit chaired by French President Nicolas Sarkozy, leaders of the 15 countries using the euro offered their most detailed battle plan yet for bandaging the crippled credit markets and halting panic among investors.

“We need concrete measures, we need unity, which is what we achieved today,” Sarkozy told a press conference at the Elysee Palace in Paris. “None of our countries acting alone could end this crisis stop.”

As they improvised a response to the banking calamity that started on Wall Street, Europe’s leaders sought to go beyond pledges made by the Group of Seven and to deflect criticism that they are taking scattershot country-by-country steps without a credible joint strategy.

The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a commitment to recapitalize any “systemically” critical banks in distress.

France, Germany, Italy and other countries will announce national measures tomorrow, Sarkozy said.

“I don’t even want to imagine what might happen” if the markets react negatively, Klaus-Peter Mueller, head of the German banking association, said earlier today in Washington before the blueprint was unveiled. The market response may be something “we haven’t seen at any stage in our lifetimes.”

A communiqué gave no indication of how much governments are willing to spend or the size of bank assets deemed at risk, leaving unclear the ultimate cost to the taxpayer.

Update 3:50 PM More detail from the New York Times:

European financial and political leaders agreed late Sunday to a plan that would inject billions of euros into their banks in a bid to restore confidence to the teetering financial system.

President Nicolas Sarkozy of France, left, welcomed Prime Minister Gordon Brown of Britain to the Élysée Palace.
Taking their cue from a rescue plan announced last week by Britain, the European countries led by Germany and France pledged to take equity stakes in distressed banks and vowed to guarantee bank lending for periods up to five years.

Following the British rescue package announced last week, countries led by Germany and France pledged to take equity stakes in distressed banks and vowed to guarantee bank lending for periods up to five years.

Both France and Germany were planning to unveil national rescue packages on Monday worth hundreds of billions of euros, officials said….

Leaders of the 15 countries that use the euro did not put a price tag on any of their promises — contrary to Britain, where Prime Minister Gordon Brown announced £150 billion, or $255 billion, in government funds and other measures, and the United States, where a $700 billion bailout plan will now partly be used to recapitalize banks.

European officials said actions would be taken at the national level, within the framework of the agreed “toolbox.” The idea, they said, was that governments face different challenges and needed to act quickly but that a common front would avoid the possibility that one country might undercut another.

Each country, Mr. Reynders said, will announce concrete figures for the measures they expect to take individually.

“There is no question of setting up a European fund,” he said.

Yves here. The markets would likely have responded well to a fund. I am not certain what the reaction will be to lesser measures. We needed to see an authoritative response. We will see soon enough if this passes muster.

Germany is considering a plan to inject 50 billion to 100 billion euros into its banks, with a price tag for all of the new measures reaching as much as 400 billion euros, or $536 billion, according to a person briefed on the government’s work. A German official cautioned that the numbers remained speculative.

Current plans are to have the package approved by the cabinet on Monday and through the German Parliament this week.

France is expected to announce a two-pronged plan aimed at safeguarding the solvency of French banks and jump-start lending between financial institution, according to a senior official who has worked on the plan.

Paris is expected to buy stakes in banks threatened by failure, though the magnitude of any rescue fund will be smaller than the 50 billion to 100 billion euro plan expected in Germany, the official said. “Our need for recapitalization is certainly weaker than that in Germany,” he said.

The French government will also pledge more than 100 billion euros to address liquidity concerns in banks and insurers. A new instrument guaranteeing bank debt in exchange for collateral will be announced, the official said. A draft law will be passed Monday in an extraordinary cabinet meeting and will be submitted Tuesday to Parliament….

Michel Fleuriet, director of the investment banking program at Université Paris-Dauphine and the former head of Merrill Lynch in France, “These measures should add some life to the short-term financing of the economy,” Mr. Fleuriet said after news of the deal. “But it’s going to take some time for the market to digest this information. If investors are convinced that that the banks are going back to doing their jobs — financing the real economy — the stock market could stabilize. Right now the stock market believes the economy is dead.”

The stock markets will make an initial judgment immediately, when even if this plan works, I’d expect to see a gradual unthawing. An incorrect thumbs down (or say an initial rally followed by a retreat into negative territory) could cast doubt on the measures before they would start to have an effect.