Paris - One day after the euro-zone summit on the finance
crisis, French President Nicolas Sarkozy on Monday presented a bank
rescue plan that could cost as much as 360 billion euros (490 billion
dollars).
The proposal calls for a maximum of 320 billion euros of
guarantees to restore confidence in the interbank credit market and
stimulate lending between banks and from banks to households and
businesses.
Afraid of lending to failing institutions, banks were 'keeping
liquidity for themselves and it was no longer circulating,' Sarkozy
told journalists in Paris.
To that end, the French government will create an authority that
will guarantee loans for a period of five years, the French president
said.
In return, banks will be asked to provide certain obligations,
including the manner in which its executives are paid. Sarkozy has
vowed to do away with exorbitant severance payments to executives who
have incurred unreasonable risks.
The amount of 320 billion euros was 'a maximum,' Sarkozy said. 'It
will probably never be reached. And it will not cost the taxpayer
anything.'
To recapitalize struggling financial institutions, the French
government will create another authority in which the state will be
the only shareholder, the French president said.
Its function will be to make funds available to solvent banks with
state guarantees and it will have at its disposal 40 billion euros.
Its first measure, already agreed, will be to take on 5.7 per cent
of the struggling French-Belgian financial services group Dexia, the
web site of the daily Le Monde reported on Monday.
'The French state will not let any bank fail,' Sarkozy declared.
To prevent bank failure, the state will take control of the
institution and change its management, he added.
He said that the proposals would be put before the two houses of
Parliament on Tuesday and voted into law by the end of the week.
These measures, which are similar to those taken Monday by Britain
and Germany, were agreed late Sunday by the leaders of the 15
euro-zone nations meeting in Paris.
'The greatest risk now would have been not to be bold,' Sarkozy
said. 'There was no other reasonable choice.'
However, according to Dominique Barbet, an economist for the
French bank BNP Paribas, the proposals to support interbank lending
and struggling financial institutions 'look okay' but have probably
come too late to avoid a recession.
'The problem is that no matter what measures you take you will not
avoid a credit crunch,' Barbet said. 'We are heading for tough
economic times.'
However, without the plan the industrial nations would have
experienced a depression, he said. 'In this regard, a recession is a
kind of best-case scenario.'
Benoit Debroissia, financial analyst at Richelieu Finance in
Paris, agreed, saying that the measures will almost certainly 'open
the credit faucet, but perhaps they have come too late.'
The problem, he said, was that they may not restore the confidence
of households and businesses while the economy is in recession.
'We are looking at a gloomy economic forecast for the end of this
year and the beginning of 2009,' he said. 'So you could have a
situation in which credit is available but few will take advantage of
it because they are afraid to invest or spend.'
Debroissia said that governments may be forced to undertake
measures to 'relaunch the twin motors of economic growth - household
spending and investment' - such as state investment in research and
development.
USA
Your Talkback on this Story