Germany, Britain unveil crucial bank rescues

By Mathias Sobolewski and Noah Barkin

BERLIN/PARIS (Reuters) - Germany and Britain announced massive financial rescues on Monday as governments across Europe stepped in to shield banks and restore confidence in the face of the worst financial crisis in nearly 80 years.

The German cabinet approved a rescue package that will provide 400 billion euros ($543.4 billion) in bank guarantees and a further 100 billion euros in state funds to recapitalize banks, according to coalition sources and a government paper.

Britain meanwhile waded in with 37 billion pounds ($63.85 billion) of taxpayers' cash to bail out three major banks, in a move that could make the government their main shareholder.

France and other euro zone countries were set to announce similar plans simultaneously at 3 p.m. (1300 GMT) Central European Time.

The drastic steps were a crucial test of investor faith in the ability of European governments to get a grip on the global financial crisis after they promised coordinated rescue packages at an emergency summit in Paris on Sunday.

Initial reaction was positive. Stock markets across Europe rallied on the outcome of the 15-nation euro zone summit, designed to restore trust in the banking system and rekindle frozen interbank lending.

"Thanks to the decisions that have just been taken, the peak of the crisis is perhaps behind us," Dominique Strauss-Kahn, managing director of the International Monetary Fund, told French radio.

The interbank cost of borrowing three-month sterling and euro funds also eased in response to the bank rescue measures.

France was preparing a plan to create a fund of 40 billion euros to aid troubled banks and provide up to 300 billion euros in bank guarantees, according to media reports.

Italy was also expected to present new measures for its financial sector.

Spanish Prime Minister Jose Luis Rodriguez Zapatero, whose country has been hit by a house price crash, said the bank bailouts could dent European sovereign debt credit ratings.

Under European Union accounting rules, the cost will be added to national debt rather than budget deficits.

BUDGET BALANCE BURIED

The executive European Commission acknowledged that any hope of member states' balancing their budgets in 2010 as promised last year had been buried by the "exceptional circumstances."

"With the deterioration in the economic situation, there is going to be a deterioration of public finances. Fiscal revenues are diminishing and in some cases, they are diminishing strongly," Commission spokeswoman Amelia Torres told a briefing.

"Expenditure remains the same and in some cases it's increasing where unemployment has already gone up," she said.

Underpinning the government plans, European central banks said they would lend as much U.S. dollar liquidity as commercial banks needed in renewed joint bid to tame money market tensions.

"The biggest change from today relative to last week is the fact that euro zone officials seem to have come up with a template plan from which national governments can pick and choose and implement where they see necessary," said Derek Halpenny, European head of Fx research at BTM-UFJ.

Although governments are bracing for a prolonged period of economic weakness, they hope the measures announced on Monday will stem a crisis of confidence in the financial system that has sent global stock markets spiraling lower.

"Despite prospects of a worsening economic crisis, we believe that the nationalization of parts of the banking system could be viewed as the defining moment that marked the start of the end of the financial crisis," Philip Finch, global banks analyst at UBS, said in a note to clients.

In a stunning reversal of Thatcherite free-market dogma, British Prime Minister Gordon Brown's government is likely to become the biggest shareholder in Royal Bank of Scotland and lender HBOS .

For weeks, European governments were divided about how to address the crisis, which reached new heights last month with the collapse of U.S. investment bank Lehman Brothers and quickly spread across the Atlantic.

Some countries, like France and Italy, mulled the idea of a Europe-wide rescue fund. Others, like Germany, resisted blanket measures and advocated a case-by-case approach to bank troubles.

"The leeway allowed to each European country lends some credibility to the likelihood of European plans moving forward quickly and possibly being adopted by each country's parliament by the end of this week," SocGen said in note.

Brown, whose decisive action during the crisis has bolstered his political standing at home, called on Monday for world leaders to come together to remake the Bretton Woods agreement for a new globalized financial system. France has already called for a summit of major economies based on an expanded Group of Eight industrial nations.

(Writing by Paul Taylor and Noah Barkin; Reporting by Reuters

bureaux in Europe; Editing by Dale Hudson)