Scramble To Avoid Collapse

Scramble to avoid collapse
By Chris Giles and Alan Beattie in Washington and Ben Hall in Paris
Published: October 12 2008 01:17 Last updated: October 12 2008 18:54

World leaders are scrambling to finalise rescue plans for their banking systems before stock markets open on Monday, amid fears that the global financial system is on the brink of collapse.

In Europe, France and Germany were close to announcing dramatic plans to shore up their banks while in Britain, the government was preparing a radical state recapitalisation of some of the country's biggest banks.

In the US, officials were also working to finalise a plan to recapitalise their banks and other financial institutions.

In the Asia Pacific, Australia and New Zealand announced guarantees for all bank deposits, as did the United Arab Emirates, while elsewhere in the Middle East, Saudi Arabia cut its interest rates.

The extraordinary series of moves, which followed record market falls last week, came amid grave concern over the weekend that investors would start scrambling for cash this week, threatening the implosion of financial institutions across the world.

As world leaders and bankers gathered in Washington for the weekend Group of Seven and global financial body meetings, Dominique Strauss-Kahn, International Monetary Fund managing director said: “Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.”

Josef Ackermann, head of Deutsche Bank and chairman of the Institute of International Finance, representing nearly 400 of the world's largest banks, said the next 24 hours was a ”critical moment” for the world financial crisis. ”If we miss this opportunity we will have more deterioration” in markets, he said.

G7 ministers in Washington produced a broad-brush plan on Friday to stop banks failing, unfreeze bank funding, inject capital into banks, reform deposit insurance and unblock markets for securitized assets.

It appeared at first that they would not produce specific measures but as the weekend progressed, a determination to act quickly emerged.

Christine Lagarde, the French finance minister said a hastily arranged Eurozone summit in Paris on Sunday would “put meat, muscles on the bones of that [G7] skeleton and to develop, follow up and execute upon it”.

Officials said the eurozone leaders were discussing a draft document likely to agree to follow the broad outlines of the British bailout plan - the state taking stakes in banks, guaranteeing new bank borrowing and providing extra liquidity - but adapting the tools to national circumstances.

In addition the European Central Bank would create an unsecured lending facility to buy commercial paper from banks, similar to the move by the US Federal Reserve last week, providing, in effect, guaranteed funding for banks.

Alistair Darling, the British chancellor said all government needed “to act now … The threat is blindingly obvious. You can't stabilise economies unless you have a stable banking system”.

The German finance ministry said it would outline its detailed plans on Monday. A spokesman for the Finance ministry said:” ”The aim is for an orderly but quick legislative process aimed at averting risks for our economy”.

Some financial markets in the Middle East were open on Sunday, giving a mixed response to the weekend's developments. In its first trading sine last Tuesday, Israeli shares were down only 3.8 per cent, having opened 8 per cent lower. Stocks tumbled another 5.4 per cent in Dubai, but only 0.8 per cent in Bahrain.

With emerging markets becoming engulfed in the world financial turmoil, the IMF also said on Sunday it was exploring ways to provide emergency loans without the normal delays and long lists of conditions attached to its standard lending programmes.

Copyright The Financial Times Limited 2008