European Countries Commit $1.1 Trillion Euros to Guarantee Bank Loans

Racing to prevent the collapse of the financial system, France, Germany, Spain and Austria committed 1.1 trillion euros ($1.5 trillion) to guarantee bank loans and take stakes in lenders.   
   
The announcements came as Britain took majority stakes today in Royal Bank of Scotland Plc and HBOS Plc. The coordinated steps followed a pledge yesterday by European leaders to bolster market confidence as the global economy slides toward recession.   
   
"What it should do is stabilize the banking system,'' said Peter Hahn, a fellow at London's Cass Business School and former managing director at Citigroup Inc. "Will it stop us from having a recession? No, nothing is going to stop us from having a recession.''   
   
In Germany, Chancellor Angela Merkel pledged to guarantee up to 400 billion euros of lending between banks and set aside 20 billion euros to cover potential losses. It will also provide as much as 80 billion euros to recapitalize banks, about 3.2 percent of the German economy, based on 2008 gross domestic product figures from the International Monetary Fund.   
   
The U.S.'s $700 billion package to buy toxic bank debt and possibly recapitalize banks equals 4.9 percent of GDP.   
   
French Plan   
   
In France, President Nicolas Sarkozy said the state will guarantee 320 billion euros of bank debt and set up a fund allowed to spend up to 40 billion euros, or 2 percent of GDP, to recapitalize banks.   
   
"The greatest risk is in inertia,'' Sarkozy said today.   
   
The French government has already taken steps to protect banks caught up by the credit squeeze. France, along with Belgium and Luxembourg, last week guaranteed the borrowings of Dexia SA, extending a 6.4 billion-euro bailout to the world's largest lender to local governments.   
   
Banks in France may be holding up better than most U.S. and European rivals. BNP Paribas SA, France's largest bank, last week agreed to take control of Fortis in Belgium and Luxembourg for 14.5 billion euros, completing a breakup of what was once Belgium's largest financial-services company.   
   
Spanish Measures   
   
Spain's cabinet today approved measures to guarantee up to 100 billion euros of bank debt this year and authorized the government to buy shares in banks in need of capital. Prime Minister Jose Luis Rodriguez Zapatero told a news conference in Madrid that no banks needed recapitalizing now and the measure was "preventative and precautionary.''   
   
Before Europe forged a common response to the crisis, Spain was one of the countries to produce unilateral measures to shore up banks, pledging to buy up to 50 billion euros of assets.   
   
The Austrian government will set up an 85 billion-euro clearinghouse run by the Austrian Kontrollbank to provide cash by holding illiquid bank assets as collateral. Austria also pledged to buy banking shares if and when domestic financial institutions seek to sell new stock.   
   
Italy will guarantee some bank debt and buy preferred stock in banks if necessary, Finance Minister Giulio Tremonti said in Rome, without providing any figures.   
   
Tremonti said Italy would put forward "as much is necessary'' to shore up the country's banking system.