After a whirl of emergency meetings, government leaders on both sides of the Atlantic produced bold promises to rescue the global financial system, but were still racing to work out the details to calm battered stock markets before they opened this morning.
In the wake of the carnage in last week's markets, European countries pledged to inject capital into ailing banks and guarantee lending between banks – a step analysts called critical to easing a crisis of confidence and shaking credit markets loose.
Europe's action throws the spotlight back to the U.S., where officials said Treasury Secretary Henry Paulson was studying the feasibility of backing up loans between banks here. Lending between banks is considered vital to the smooth operation of the financial system and the broader economy, but it has slowed considerably because banks are concerned about being repaid.
The Treasury Department was not expected to announce anything before today, officials said. But the government was helping an American financial icon, Morgan Stanley, trying to salvage a $9 billion investment by a Japanese bank, Mitsubishi UFJ Financial.
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The initial investor reaction was positive, with stocks up in several Asian markets and U.S. stock futures – which are bets on the direction of the market before it opens – higher, as well. The early signs, after one of the worst weeks ever for stock markets, are not a definitive sign of a reversal in sentiment, but were seen as a potentially hopeful sign that the markets may at least stop their free fall.
“It's going to take actions more than words at this time, given the extreme distress that the money markets are in and the extreme distress that the equity markets were in,” said Douglas Peta, a market strategist at J&W Seligman & Co. He predicted further drops in the stock and bond markets; the Dow Jones Industrial Average fell 18 percent last week.
In Paris, European leaders agreed to a unified plan to inject billions of euros into their banks and guarantee bank borrowing for up to five years. President Nicolas Sarkozy of France, who led the talks in the 18th-century Elysee Palace, said governments would announce concrete rescue plans, tailored to their national circumstances, simultaneously on Monday.
“We need concrete measures, we need unity,” Sarkozy declared. “That's what we achieved today.”
Leaders of the 15 countries that use the euro did not put a price on any of their promises – contrary to Britain, where last week Prime Minister Gordon Brown announced $255 billion in government funds and other measures to stabilize its banks, or the U.S., where a $700 billion bailout plan will now be used partly to infuse banks with fresh capital.
The U.S. is overhauling its rescue package, which had originally focused on buying distressed assets from banks. In a policy turnabout, Paulson said Friday the government would now take equity stakes in banks; the government's role in the Morgan Stanley negotiations may be an early test of the Treasury's retooled strategy.
The government has so far been reluctant to guarantee bank loans to other banks out of concern that it could give banks a competitive advantage over other financial institutions, and thus have unintended consequences.
Max Bublitz, chief strategist at SCM Advisors in San Francisco, said the U.S. should follow the lead of the Europeans, whom he said are proving more adroit in their response. Markets, he said, will remain unsettled until policy makers take concrete steps to shore up the banks.
“We still need to see some of these capital injections actually occurring and see what impact it has on balance sheets, and does it attract other capital from sovereign wealth funds and others,” Bublitz said.
Europe may have acted more quickly, in large part, because banks there are facing urgent problems, said Tobias Levkovich, chief equity strategist at Citigroup. Many European financial firms have borrowed more extensively relative to their capital than most American banks.
Officials said France and Germany intended to announce national plans on Monday worth hundreds of billions of euros.
In Britain, the first major country to announce a recapitalization plan, officials appeared to be speeding plans to inject capital into its troubled banks. At the top of the list is Royal Bank of Scotland, whose market value has fallen to below $20 billion – less than what it raised from private investors in June.
It is expected to need about that amount from the government, which would give a majority stake to the Exchequer, the British equivalent of the U.S. Treasury.