European leaders hatch aid plan for banks in crisis

By Huw Jones and Brian Love

PARIS (Reuters) - European leaders hurried out plans to help banks through the worst financial crisis since the 1930s, pledging before panicky world markets reopened that any solvent institution would get public funding if needed.

"This needs concrete measures and unity -- that's what we have today," French President Nicolas Sarkozy, who hosted an emergency meeting of leaders from the 15 euro zone countries plus Britain, told a news conference on Sunday.

Governments agreed commitments to provide capital for banks caught short of funds because of frozen money markets and to insure or buy into new debt issues, a summit statement said.

Keen to show markets that governments mean business, Sarkozy said people could expect a flurry of coordinated announcements of financial details on Monday from national capitals across Europe, notably Paris, Berlin and Rome on Monday afternoon.

Germany alone is expected to unveil a rescue package for its banks worth around 400 billion euros ($549 billion), an official in Chancellor Angela Merkel's conservative party said on Sunday.

Sarkozy said the Paris summit showed that Europe was able despite myriad national borders to respond collectively to the crisis, which spread from the United States more than a year ago but has hit fever pitch in recent weeks.

"This is not a gift to banks but to help them function," he said.

According to the joint statement, leaders pledged to help or directly subscribe to debt-raising by banks for periods of up to five years. This should take the pressure off the blocked interbank market and also off groaning bank balance sheets.

"This announcement of concrete, decisive and well-targeted measures to be deployed simultaneously by individual governments should reassure markets," said Marco Annunziata, chief economist with UniCredit Markets and Investment Banking in London.

"After much hesitancy, European policymakers are now racing ahead of the U.S. in their efforts to solve the crisis."

CRITICAL HOURS

The root cause of the crisis was a U.S. housing boom that went bust, and with it a market in mortgage-related debt and derivatives that turned toxic with the downturn. That marked the start of a credit squeeze a year ago that snowballed worldwide.

Officials had billed the Paris summit as a gathering where leaders would have to move beyond declarations and produce something tangible markets could believe in.

"Tonight, tomorrow morning are very critical moments," said Josef Ackermann, Deutsche Bank CEO and chairman of the Institute of International Finance, told reporters in Washington.

The American Standard & Poor's 500 index tumbled more than 18 percent last week, its worst weekly fall on record. European stocks plunged 22 percent and Tokyo's Nikkei crashed 24 percent.