Euro area looks to UK for bank rescue blueprint

The fifteen euro area countries have outlined a common strategy to inject fresh capital into their ailing banking sectors in a move which broadly replicated a blueprint presented last week by UK Prime Minister Gordon Brown.

Meeting at an emergency summit in Paris on Sunday (12 October), the fifteen leaders devised a “concerted European action plan of the euro area countries,” listing a series of “principles” to rescue their financial sector in a week that saw European stocks plummet by more than 20%.

The move was presented as a contribution to “a common European approach” ahead of a summit of all 27 EU countries on 15-16 October in Brussels that will seek to adopt “a mechanism to improve crisis management between European countries”. 

The scheme involves government coverage of banks’ debts, subject to a time limit of up to a maximum of five years. Crucially, the scheme would also cover lending between banks, a key feature of a British plan unveiled by Prime Minister Gordon Brown last week.

Brown was invited to attend the weekend summit, which also included the leaders of the eurozone countries, European Central Bank President Jean-Claude Trichet, European Commission President José Manuel Barroso and Jean-Claude Juncker, Luxembourg’s prime minister and eurozone chief.

“Today we discussed a comprehensive plan that would not only involve cash in financial markets, but also recapitalise our financial system” and fund mortgages, Brown said after the summit, according to Bloomberg. “I believe our European colleagues will move ahead with the comprehensive plan. There’s common ground now,” he added.

The UK plan, outlined on 8 October, provides loan guarantees to the whole British banking system and effectively amounts to the part-nationalisation of the main British banks. It is estimated to be worth some £500 billion.

Details of the British scheme will be presented today. Meanwhile, Germany is expected to unveil a similar rescue package, estimated at around €400 billion.

The euro area scheme will be applied “until 31 December 2009” and tailored to each country’s market conditions, the leaders said in a statement. They also said national actions would be designed “in order to avoid any distortion” on the markets which may in turn “adversely affect” other member states.

Meanwhile, the European Commission welcomed the submission of a revised Irish scheme to protect its banking system, saying it avoided “unnecessary distortions of competition with other banks” and “negative spillovers in other member states”. 

In particular, the Commission welcomed the fact that the revised Irish scheme was “non-discriminatory” and covered all banks “with systemic relevance to the Irish economy, regardless of origin”.

The original scheme had been criticised because it was originally aimed solely at Irish banks.

Read more with Euractiv

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