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Governments step up efforts to shore up faltering bank sector
2008-10-19
PARIS (AFP) - Nations around the world took new emergency steps Sunday to shore up the international banking system and restore investor confidence, as a yawning finance crisis continued to roil global markets. The crisis led Sunday to the ouster of the top brass at a top bank in France and prompted the Dutch government to bail out another in the Netherlands. The top echelon of France's Caisse d'Epargne quit at an emergency meeting Sunday, the latest casualties of the ongoing crisis. The chairman, director-general and finance director of the French bank quit over a 600 million euro (800 million dollar) loss in a derivatives trading "incident" on October 6 as world share markets were crashing over the global finance crisis. Also on Sunday, the Dutch government announced that it will inject 10 billion euros (13.4 billion dollars) into ING, one of the world's 20 biggest banks. The Netherlands government made its announcement after ING announced Friday that it expected a 500 million euro net loss in the third quarter. Tumult in Europe's banking sector followed similar upheaval in South Korea, which on Sunday offered up to 100 billion dollars in guarantees for bank borrowing in foreign currencies and put a 30 billion dollar injection into the bank system. Dominique Strauss-Kahn, director of the International Monetary Fund, applauded the Korean measures, saying the announced guarantee of banks' external liabilities would bring Korea's policies would "help ease pressures in the local dollar funding market." Meanwhile, world leaders lined up a series of summits on reforming global finance. The summits, announced following talks between US President George W. Bush and French President Nicolas Sarkozy, are the latest fruit of efforts to coordinate an international response to the crisis. But there were already signs of rival visions for the summits, with European leaders pushing for a radical overhaul of the global financial architecture while Bush said the foundations must be preserved. "As we make the regulatory and institutional changes necessary to avoid a repeat of this crisis," Bush told Sarkozy and EU commission chief Jose Manuel Barroso in the talks Saturday, "it is essential that we preserve the foundations of democratic capitalism -- the commitment to free markets, free enterprise and free trade. "We must resist the dangerous temptation of economic isolationism and continue the policies of open markets that have lifted standards of living and helped millions of people escape poverty around the world." The tone of Bush's remarks after the talks at his Camp David retreat in Maryland was markedly different from those from Sarkozy who has been urging a broad overhaul of the so-called Bretton Woods system of international finance and commerce put in place during World War II. "Once calm has been restored, we must avoid at all costs that those who have led us to where we are today should be allowed to do so once again," said Sarkozy. Although no date has yet been set, the first of the summits will likely be held next month, after the presidential election on November 4, White House spokesman Tony Fratto said. Critics say the institutions sketched out after the Great Depression -- the World Bank and International Monetary Fund -- are ill-equipped to deal with the globalized economy and the complexities of modern finance. The calls for fundamental reforms by Sarkozy, current head of the EU, received backing from Spain's Prime Minister Jose Luis Rodriguez Zapatero. "There has to be a stricter regulation and international supervision, at least at the level of the European Union," the Socialist leader was quoted as saying in the newspaper Publico. Seventy francophone nations and regional governments also backed calls for revamping the banking system, insisting that China, India, South Africa, Mexico, and Brazil should participate in the talks, not just the richest industrialized nations. "Persuaded that no country is safe from the turmoil that has shaken world credit markets and that the unrest demands an urgent and coordinated response, we commit to support an international summit on this question," said a statement the group issued at the close of a summit in Canada. The crisis erupted over the collapse of the market in high-risk subprime US home loans last year. The loans, repackaged as derivatives, had been resold to investors and banks around the world. Widespread defaults set off a chain reaction through the financial system, eventually leaving banks short of cash and hesitant to make the interbank loans essential to the system's smooth functioning. The crisis has been compounded by an economic slowdown and fears of recession -- broadly defined as when economies are in a decline for two consecutive quarters. With figures expected to show later this week that Britain is on the brink of recession, its finance minister said he planned to boost public spending. "You will see us switching our spending priorities to areas which make a difference," Alistair Darling told the Sunday Telegraph. "This is a time when you have to support the economy."
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