Draft statement from euro zone summit in Paris

PARIS (Reuters) - Leaders of euro zone countries held an emergency meeting on Sunday to discuss specific, pan-European measures aimed at propping up the battered financial sector and halt market panic.

Here is the text of a draft statement being studied by the leaders which was handed out to reporters shortly after the summit got underway.

DECLARATION ON A CONCERTED EUROPEAN ACTION PLAN OF THE EURO

AREA COUNTRIES 1) - Financial systems contribute essentially to the well functioning of our economies and are therefore a necessary prerequisite for growth and a high level of employment. Millions of depositors have trusted their wealth to our financial institutions. The consequences of the current financial market crisis jeopardize the crucial economic role of the financial system. 2) - Since the beginning of the crisis, we have acted to address the challenges posted to our financial system: we have committed ourselves to take decisive action and use all available tools to support systemically important financial institutions and prevent their failure and effectively acted in several cases; we have increased transparency and disclosure on banks exposure; we have enhanced retail deposit guarantee protection. 3) - Further concerted action is urgently needed given the lasting freeze of the interbank market and the contagion from the financial crisis to the real economy. 4) - We confirm today our commitment to act together in a decisive and comprehensive way in order to restore confidence and proper functioning of the financial system, aiming at restoring appropriate and efficient financing conditions for the economy. In parallel, Member States agree to coordinate measures to address the consequences of the financial crisis on the real economy, in line with 7th of October Ecofin conclusions. 5) - As members of the Euro area, we share a common responsibility and have to contribute to a common European approach. We invite our European partners to join the following principles so that the European Union as a whole can act in a united manner and avoid that national measures adversely affect the functioning of the single market with a single currency. This requires European Union and euro area governments, central banks and supervisors to agree to a coordinated approach aiming at: -ensuring appropriate liquidity conditions for financial institutions; -facilitating the funding of banks, which is currently constrained; -providing financial institutions with additional capital resources so as to continue to ensure the proper financing of the economy; - ensuring sufficient flexibility in the implementation of accounting rules given current exceptional market circumstances; - enhancing cooperation procedures among European countries. Ensuring appropriate liquidity conditions for financial institutions 6) - We welcome the recent decision by the European Central Bank and other Central Banks in the world to cut their interest rates. 7) - We also welcome the decisions by the European Central Bank to improve the conditions for the refinancing of banks and for providing more longer term funding. We look forward to Central Banks considering all ways and means to react flexibly to the current market environment.

We also look forward to the European Central Bank to creating a commercial paper facility and similar instruments so as to provide liquidity to financial and non financial companies as long as the current financial turmoil prevails.

Facilitating the funding of banks, which is currently constrained. 8) - With a view to complementing the actions taken by the European Central Bank in the interbank money market, the governments of the euro area are ready to take proper action in a concerted and coordinated manner to improve market functioning over long term maturities. The objective of such initiatives should be to address specific failures in present refinancing conditions. To this aim, governments would make available for an interim period and on appropriate commercial terms, directly or indirectly, a Government guarantee, insurance, direct purchase or other similar arrangements - notably exchange of ineligible collateral with government securities - of new medium term (up to 5 years) bank senior debt issuance. Depending on domestic market conditions in each country, actions could be targeted at some specific and relevant types of debt issuance. In all cases, these actions will be designed in order to avoid any distortion in the level playing field and possible abuse at the expense of non beneficiaries of these arrangements. As a consequence: - the price of those instruments will reflect at least their true value with respect to normal market conditions; - all the financial institutions incorporated and operating in our countries and subsidiary of foreign institutions with substantial operations will be eligible, provided they meet the regulatory capital requirements and other non discriminatory objective criteria; - Governments may impose further conditions for the beneficiaries of these arrangements, including conditions to ensure an adequate support to real economy; - The scheme will be limited in amount, (be) temporary and will be applied under close scrutiny of financial authorities, until December 31, 2009

While acting quickly as required by circumstances, we will coordinate in providing these guarantees as significant differences in national implementation could have a counter-productive effect, creating distortions in the global banking markets. We will also work in cooperation with the European Central Bank so as to ensure consistency with the management of liquidity by the Eurosystem.

Providing financial institutions with additional capital resources so as to continue to ensure the proper financing of the economy.

9) So as to allow financial institutions to continue to ensure the proper financing of the Eurozone economy, each member state can make available to financial institutions Tier 1 capital, e.g. preferred shares or other instruments including non dilutive ones. Price conditions shall take into account the market value and the rating of each involved institution. Governments commit themselves to provide capital when needed in appropriate volume while favoring by all available means the raising of private capital. Financial institutions might be obliged to accept additional restrictions, notably to preclude possible abuse of such arrangements at the expense of non beneficiaries. 10) - Given the exceptional market circumstances, we urge national supervisors, in accordance with the spirit of Basle 2 rules, to implement prudential rules also with a view to stabilizing the financial system.

Allowing for an efficient recapitalization of distressed banks. 11) - Governments remain committed to avoid any failure of systematically relevant institutions, through appropriate means including recapitalization. In doing so, we will be watchful regarding the interest of taxpayers and ensure that existing shareholders and management bear the due consequences of the intervention. Emergency recapitalization of a given institution shall be followed by an appropriate restructuring plan. Ensuring sufficient flexibility in the implementation of accounting rules given current exceptional market circumstances. 12) - We urge the Commission to take immediate steps to implement the conclusions of the Oct 7 Ecofin regarding the classification of financial instruments by banks between their trading and banking books. Under current exceptional circumstances, financial institutions should be allowed to value their assets consistently with risk of default assumptions rather than immediate market value which, in illiquid markets may be no longer appropriate. We ask the competent authorities to take the next steps within the coming days. Enhancing cooperation among European countries, 13) - In such circumstances, efficient crisis management requires timely and accurate information of all actors. We will therefore set up and strengthen procedures allowing the exchange of information between our governments, the acting President of the European Union, the President of the European Commission, the President of the European Central Bank and the President of the Eurogroup. We ask the European Council next Wednesday to submit a proposal to improve crisis management between European countries. 14) - The Ecofin Council with the support of the Commission and in cooperation with the European Central Bank will report to the European Council on the implementation of these decisions.

(Reporting by Crispian Balmer and Anna Willard)