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Key points of euro nations’ financial crisis plan

Posted by smeddum on October 12, 2008

Oct 12, 5:43 PM EDT

Key points of euro nations’ financial crisis plan

European leaders agreed to several measures (AP) — German Chancellor Angela Merkel called them a “tool kit” – that governments will be able to use to shore up financial institutions and stop banks’ financing problems from contaminating the wider economy. A few highlights:

-DEBT GUARANTEES: Governments will make it easier for banks to raise new financing by putting their guarantee behind the banks’ issuance of new medium-term debt. The government guarantees help banks by giving buyers of their debt greater confidence that it will eventually be repaid. These guarantees will be available for all financial institutions operating in EU member states, and will be valid until Dec. 31, 2009.

-RECAPITALIZING BANKS: Governments pledged to rescue “distressed” banks through recapitalization and other “appropriate means.” Any bank saved in this way will be subject to “an appropriate restructuring plan,” the governments said – a clear hint of more management shake-ups like the one that saw the ouster of top executives of French-Belgian lender Dexia SA after the French, Belgian and Luxembourg governments gave it a 6.4 billion euros ($8.79 billion) cash injection earlier this month.

-GOVERNMENT OWNERSHIP: Governments also pledged to support banks and other financial institutions by buying preferred shares in them – in effect, supplying the banks with new capital in exchange for getting partial ownership stakes. Banks that accept government money would have to accept “additional restrictions,” the governments said, so that they don’t get an unfair competitive advantage over banks that don’t receive injections of government cash.

-ACCOUNTING RULES: Governments will urge regulators to relax so-called “mark-to-market” accounting rules. These are requirements that securities must be valued at their current price, rather than the purchase price or the price they might fetch later. Governments said that “under the current exceptional circumstances,” these rules were no longer appropriate. Banks will be allowed to value assets based on their risk of default, rather than their current market price, which in the present environment is often much lower.

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