Sarkozy proposes $490 bn bank rescue plan

October 13th, 2008 - 11:13 pm ICT by IANS  

Paris, Oct 13 (DPA) A day after the euro-zone summit on the global financial crisis, French President Nicolas Sarkozy Monday presented a bank rescue plan that could cost as much as 360 billion euros ($490 billion).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 recapitalise 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 percent of the struggling French-Belgian financial services group Dexia, the website of the daily Le Monde reported 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 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.

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.”

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