FRANCE WILL guarantee up to €320 billion in inter-bank loans, and inject up to €40 billion in fresh capital into banks and insurance companies, president Nicolas Sarkozy announced yesterday.

"The greatest risk is inertia," Mr Sarkozy said. He presented a draft law rectifying the French budget to the government yesterday. It will be debated in the French national assembly and senate today and passed by the end of the week. The draft law notes that the French budget deficit has risen €7.7 billion this year, to €49.4 billion.

The first priority is "to unblock the inter-bank market", Mr Sarkozy said. "We have to create the conditions for money to circulate again, and naturally among banks first, because they are the heart that finances the economy.

"This is the reason why the state will guarantee the loans which the banks need to refinance themselves. This guarantee will apply to loans contracted before December 31, 2009, and may last up to five years."

The loan guarantees are meant "to re-establish confidence" and "not to come to the aid of establishments in difficulty because they were badly managed and took unwise risks", Mr Sarkozy said.

The loan guarantees will be charged at market prices, and will require the borrowers to sign an agreement on ethics, in particular regarding remuneration. "One cannot ask for state guarantees and tolerate the scandalous excesses of recent years," Mr Sarkozy said. "Once calm is re-established, those who have made mistakes will be punished," he promised. Loan guarantees will also be made available to individuals, companies and local governments, for consumer purchases, mortgages and business loans. But only those with a sufficient capital base will be eligible for them, Mr Sarkozy said.

The figure of €320 billion "is a maximum which will probably never be reached", Mr Sarkozy continued. "It represents no cost to taxpayers, since it will be payable only if an establishment fails. In the absence of a failure, the taxpayer will earn the commissions on the loan guarantees."

A second state-owned company, with €40 billion at its disposal, will furnish capital "to solvent credit establishments who need it to develop their activities", Mr Sarkozy said.

The president repeated that "the French state will let no banking establishment fail".

The EU council meeting which starts tomorrow will modify accounting rules "which today help to aggravate the crisis", Mr Sarkozy said.

Taking account of differences in GNP, the French president said France's commitment of €360 billion was comparable to those of Germany and Britain.

"By offering the state's guarantee, we hope to end the crisis in confidence and thus not impose upon the French the exorbitant cost of the failure of the entire banking system.

"The reasonable gamble we are taking is that by providing this guarantee, we will not have to implement it," Mr Sarkozy concluded.