Germany and France announced massive financial rescues today as governments across Europe stepped in to shield banks and restore confidence in the face of the worst financial crisis in nearly 80 years.
German Chancellor Angela Merkel presented a rescue package that will provide €400 billion ($543.4 billion) in bank guarantees and a further €100 billion in state funds to recapitalise banks.
French President Nicolas Sarkozy, who hosted a euro area summit with Britain yesterday which agreed on the coordinated action, said France would create two funding vehicles with up to €320 billion to guarantee bank lending and €40 billion to provide capital to banks in need.
The governments of Spain and Austria announced similar emergency measures to shore up their banks and stabilise their financial system, and Italy was preparing its own package.
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 the emergency summit in Paris yesterday.
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.
But Russia's rebound was short-lived.
Moscow's RTS exchange halted stock trading as stocks fell, shedding early gains and prompting Prime Minister Vladimir Putin to pledge that companies of strategic importance in the "real economy" would get government corporate refinancing.
Sweden, which is not in the euro zone, said it would introduce legislation soon to safeguard its financial system, but saw no need to inject capital in its banking sector.
And Iceland, hardest hit by a wave of bank failures, showed signs of softening its long-standing opposition to applying for European Union membership in hopes of anchoring the sparsely populated north Atlantic island to a pole of stability.
Merkel said the financial crisis meant Europe's biggest economy would not meet previous economic growth forecasts and could miss its target of a balanced budget in 2011.
She called for the International Monetary Fund to have a stronger role in overseeing the global financial system and said a summit of the Group of Eight nations and major emerging economies next month would discuss this.
Mr Sarkozy, however, said the United States remained unconvinced of the need for such a meeting.
British Prime Minister Gordon Brown, whose decisive action during the crisis has bolstered his political standing at home, called for world leaders to come together to remake the Bretton Woods agreement for a new globalised financial system.
"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.
Reuters