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October 13, 2008    

European leaders meet to discuss financial crisis

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by Kay Murchie

The 15 Eurozone leaders have met in Paris this weekend and agreed on an emergency plan to prevent further financial institutions collapsing.

France and Germany followed the UK by spending billions of euros to guarantee loans in leading banks in a bid to fight off financial meltdown. Banks’ reluctancy to lend to each other has been the main problem of the credit crunch and it is hoped that loan guarantees will go some way to easing the problems.

Prime Minister Gordon Brown has been urging other nations to follow his lead by using similar measures to his bailout plan.

The rescue plan in the UK involves making £50 billion available to buy stakes in major banks. A further £200 billion will be provided for short term loans from the Bank of England and offering £250 billion of loan guarantees for banks lending to each other.

At the Élysée Palace in Paris, French President Nicolas Sarkozy and Angela Merkel, German Chancellor, agreed a joint pledge with the 13 other eurozone nations to recapitalise banks and guarantee lending between them.

According to Mr Sarkozy, all aspects of the financial crisis will be addressed via this plan.

Other steps announces include the Norwegian branch of crisis-torn Icelandic bank, Kaupthing, being taken over by Norway’s Government.

Across the Atlantic, the US announced over the weekend it will invest in US banks by using the $700 billion (£380 billion) bailout fund set aside by Congress.

Portugal has announced a €20 billion (£16 billion) state guarantee for banks while Australia has agreed to guarantee all deposits in the banks, building societies and credit unions until 2011. New Zealand is guaranteeing all retail bank deposits until 2010.

Following the new measures, Gordon Brown expects confidence to return in the banking system over the next few days.

Shares have plummeted worldwide amid fears of a global recession. In the last 10 trading days, Wall Street lost 20% of its value and suffered its largest weekly fall since the Dow Jones index was created in 1896.

The FTSE 100 crashed below the 4,000 mark on Friday and suffered its worst week since the 1987 crash.

The turmoil throughout the world’s financial markets resulted in six central banks cutting interest rates by 0.5% last Wednesday - a day earlier than scheduled.

In the meantime, the International Monetary Fund (IMF) warned global equities could plummet by a further 20% this week unless decisive action is delivered by Governments to tackle the crisis.

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