European governments promise loan guarantees and bank restructuring

Eurozone governments will guarantee medium-term bank senior debt "on appropriate commercial terms" until the end of 2009, according to a communiqué issued yesterday. They will also invest in eurozone financial institutions, buying either preferred or ordinary shares in order to boost their Tier 1 capital levels .

The summit called on European regulators to ease capital requirement rules such as Basel II: supervisors should "implement prudential rules with a view to stabilising the financial system" and should allow banks and non-financial institutions to abandon mark-to-market accounting for illiquid instruments.

The eurozone plan follows the lead set last week by the UK government, which announced it would take equity stakes in UK banks totalling up to £50 billion in order to boost capital levels and prevent another bank failure. The US treasury secretary Henry Paulson has since announced that the US government could follow suit and invest in US banks.

But, in contrast to the UK rescue plan, the eurozone announcement did not specify the scale of the planned intervention: individual governments are expected to give details later today.

European markets reacted strongly to the news: at 0930 London time today, the London FTSE 100 had risen 6.5% to 4188.04, the Frankfurt Dax was up 6.7% to 4846.63, and the Paris Cac 40 was up 7.5% at 3413.94.

See also: UK to lead global efforts to restore stability
US may buy shares in troubled banks, Paulson says
UK government unveils £50 billion bank recapitalisation plan

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