Germany, France and Britain announced massive financial rescues on Monday as governments across Europe stepped in to shield banks and restore confidence in the face of the worst financial crisis in nearly 80 years.
German Chancellor Angela Merkel presented a rescue package that will provide 400 billion euros ($543.4 billion) in bank guarantees and a further 100 billion euros in state funds to recapitalise banks.
French President Nicolas Sarkozy, who hosted a euro area summit with Britain on Sunday which agreed on the coordinated action, said France would create two funding vehicles with up to 320 billion euros to guarantee bank lending and 40 billion euros to provide capital to banks in need.
Britain waded in with 37 billion pounds ($63.85 billion) of taxpayers' cash to bail out three major banks, in a move that could make the government their main shareholder.
The governments of Spain and Austria announced similar emergency measures to shore up their banks and stabilise their financial system, and Italy was preparing its own package.
The drastic steps were a crucial test of investor faith in the ability of European governments to get a grip on the global financial crisis after they promised coordinated rescue packages at the emergency summit in Paris on Sunday.
Initial reaction was positive. Stock markets across Europe rallied on the outcome of the 15-nation euro zone summit, designed to restore trust in the banking system and rekindle frozen interbank lending.
But Russia's rebound was short-lived.
Moscow's RTS exchange halted stock trading as stocks fell, shedding early gains and prompting Prime Minister Vladimir Putin to pledge that companies of strategic importance in the "real economy" would get government corporate refinancing.
Sweden, which is not in the euro zone, said it would introduce legislation soon to safeguard its financial system, but saw no need to inject capital in its banking sector.
And Iceland, hardest hit by a wave of bank failures, showed signs of softening its long-standing opposition to applying for European Union membership in hopes of anchoring the sparsely populated north Atlantic island to a pole of stability.
U.S. UNCONVINCED
Merkel said the financial crisis meant Europe's biggest economy would not meet previous economic growth forecasts and could miss its target of a balanced budget in 2011.
She called for the International Monetary Fund to have a stronger role in overseeing the global financial system and said a summit of the Group of Eight nations and major emerging economies next month would discuss this.
Sarkozy, however, said the United States remained unconvinced of the need for such a meeting.
British Prime Minister Gordon Brown, whose decisive action during the crisis has bolstered his political standing at home, called for world leaders to come together to remake the Bretton Woods agreement for a new globalised financial system.
"Thanks to the decisions that have just been taken, the peak of the crisis is perhaps behind us," Dominique Strauss-Kahn, managing director of the International Monetary Fund, told French radio.
The interbank cost of borrowing three-month sterling and euro funds also eased in response to the bank rescue measures.
Spanish Prime Minister Jose Luis Rodriguez Zapatero, whose country has been hit by a house price crash, said the bank bailouts could dent European sovereign debt credit ratings.
Under European Union accounting rules, the cost will be added to national debt rather than budget deficits.
The executive European Commission acknowledged that hopes of member states' balancing their budgets in 2010 as promised last year had been overtaken by the "exceptional circumstances".
"With the deterioration in the economic situation, there is going to be a deterioration of public finances. Fiscal revenues are diminishing and in some cases, they are diminishing strongly," Commission spokeswoman Amelia Torres told a briefing.
"Expenditure remains the same and in some cases it's increasing where unemployment has already gone up," she said.
Underpinning the government plans, European central banks said they would lend as much U.S. dollar liquidity as commercial banks needed in renewed joint bid to tame money market tensions.
For weeks, European governments were divided about how to address the crisis, which reached new heights last month with the collapse of U.S. investment bank Lehman Brothers and quickly spread across the Atlantic.
"The biggest change from today relative to last week is the fact that euro zone officials seem to have come up with a template plan from which national governments can pick and choose and implement where they see necessary," said Derek Halpenny, European head of Fx research at BTM-UFJ.
"Despite prospects of a worsening economic crisis, we believe that the nationalisation of parts of the banking system could be viewed as the defining moment that marked the start of the end of the financial crisis," Philip Finch, global banks analyst at UBS, said in a note to clients.
