Sarkozy proposes 360-billion-euro bank rescue plan (Roundup)

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.