WASHINGTON/ COLOMBEY-LES-DEUX-EGLISES, France, Oct 11 (Reuters) - The IMF warned on Saturday the world’s financial system was on the brink of meltdown as France and Germany promised a European crisis response to try to prevent the worst global downturn in decades.
The International Monetary Fund said it backed a Group of Seven plan to try to stabilize markets and urged “exceptional vigilance, coordination and readiness to take bold action” to contain the firestorm sweeping through markets.
French President Nicolas Sarkozy and German Chancellor Angela Merkel, meeting in France, said they had “prepared a certain number of decisions” to present at a Sunday meeting of European leaders as they work feverishly to restore blocked credit markets to working order.
The United States appealed for patience but the IMF said time was short after industrialized nations failed to agree on concrete measures to end the crisis at a meeting on Friday.
“Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown,” IMF chief Dominique Strauss-Kahn said.
Strauss-Kahn later expressed confidence that government action will prove powerful enough to “unfreeze” markets in coming days.
U.S. President George W. Bush met with G7 economic chiefs and officials from the IMF and World Bank and said top industrial nations would work together to solve the crisis.
“I‘m confident that the world’s major economies can overcome the challenges we face,” Bush said, adding that Washington was working as fast as possible to implement a $700 billion financial bailout package approved a week ago.
“The benefits will not be realized overnight, but as these actions take effect, they will help restore stability to our markets and confidence to our financial institutions.”
Panic has swept through global markets, driving stocks to a five-year low on Friday and prompting banks to hoard cash. That has choked off lending, threatening to turn a global economic slowdown into a dangerously deep recession.
U.S. Treasury Secretary Henry Paulson said risks to the global economy were “the most serious and challenging in recent memory.”
An emergency meeting of euro zone leaders on Sunday will discuss a bank rescue package, taking a British initiative to guarantee lending between banks as a reference point, a source close to the French presidency said.
France’s Sarkozy said euro zone countries were seeking a joint solution, but declined to provide specifics. He planned to meet with British Prime Minister Gordon Brown shortly before Sunday’s euro zone gathering.
French Economy Minister Christine Lagarde sounded a cautious note about the British proposals, saying guarantees of interbank lending or bank deposits would have to be checked to ensure they don’t cause market distortions in the European Union.
If one country offers guarantees, it can add pressure on its neighbors to do the same.
Britain’s rescue plan, launched last week, makes available 50 billion pounds ($86 billion) of taxpayers’ money for injection into its banks and, crucially, calls for underwriting interbank lending, which has all but frozen around the globe.
Media reports on Saturday said Germany was readying a rescue package that could be worth up to $549 billion, including the injection of equity capital worth “double digit” billions into its banks and guarantees for interbank lending.
Rich nations vowed on Friday to take all necessary steps to unfreeze credit markets and ensure banks can raise money but they offered no specifics on collective action.
In a surprisingly brief statement, the G7 -- the United States, Britain, Canada, France, Germany, Italy and Japan -- stopped short of backing the British interbank lending guarantee, something many on Wall Street saw as vital to end growing market panic.
Kenneth Rogoff, a Harvard University professor and former IMF chief economist, said the G7 would have been better served adopting some version of the British plan so that banks would feel confident enough to loosen their grip on lending.
“Saying that they’ll take all steps necessary leaves hanging the question of whether they know what is best and necessary,” he told Reuters. “It was a signature moment for the G7. I think markets are going to be very disappointed.”
European Central Bank President Jean-Claude Trichet said markets needed time to digest a series of dramatic steps taken by world central banks in recent days, including pouring billions of dollars into financial markets and lowering interest rates in the broadest coordinated cut on record.
Reporting by G7 team; Writing by Emily Kaiser and Glenn Somerville; Editing by Tim Ahmann