The German finance ministry said it planned to issue €100 billion in new debt in order to set up a "financial stabilisation fund". The fund, which would be under the control of the federal government, would have two purposes: it would guarantee up to €400 billion in short-term debt (under 36 months) issued by German banks, and it would invest up to €80 billion in German bank equity, either through non-voting preferred shares or ordinary shares, or other instruments such as participatory certificates.
The debt guarantee is based on the ministry's belief that less than 5% of the insured debt will default. The fund will also have the power to buy or guarantee distressed assets if necessary to shore up the capital bases of German banks and German subsidiaries of foreign banks.
French president Nicolas Sarkozy announced this afternoon that the French government would guarantee up to €320 billion of short-term debt (with maturities of less than five years) issued by French banks until the end of next year, if the banks agreed to various measures intended to ensure continued lending to French businesses and new ethics restrictions for the banks' directors. Restrictions would also surround a possible investment of up to €40 billion in bank shares, he said.
The Spanish government, too, has followed suit, with a promised guarantee of bank debt under five years, up to a maximum of €100 billion by the end of 2008. It also is prepared to invest - in exceptional circumstances - in an unspecified amount of Spanish bank equity.
The Italian cabinet this afternoon approved a bank support plan drawn up by finance minister Giulio Tremonti, but details have yet to be released on what form the support will take or how much will be available.
The news sparked a strong rally in European equities: at 1630 London time the FTSE 100 index was up 6.8% at 4200.5, the Frankfurt Dax was up 10.2% to 5006.5, and the French Cac 40 had risen 9% to 3460.93.
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