Euopean Leaders Move Forward On Bailout

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Leaders from the 15 countries that use the Euro as currency met at a summit in Paris over the weekend to plan a bailout for European banks.They've developed an international program in hopes of stimulating markets across Europe.

RENEE MONTAGNE, host.

This is Morning Edition from NPR News. Steve Inskeep is on assignment. I'm Renee Montagne. Good morning. Governments in Europe this morning are moving to implement their own versions of a bank bailout program. In London, it was announced that three British banks are receiving more than $60 billion from the government in new capital. And the 15 European countries that use the Euro as their currency have a new bailout plan worked out at an emergency summit this weekend in Paris. The European program is meant to revive credit markets that have essentially been paralyzed in the last weeks. NPR's Tom Gjelten is in Frankfurt, and that's the financial capital of Germany, and he joins us now. And, Tom, how is the European plan going to work?

TOM GJELTEN: Well, Renee, you know, these things are so complicated. I think it's helpful to start out with some banking basics. Banks, you know, get their funds from people who deposit their money in them. The banks then turn around and loan that money out to other people who need that money to buy things or operate their businesses. But some banks are just plain richer than others. So, even after they make all the loans they want to make, they have some cash left over.

Others are not so rich, they're continually in the situation of being short of cash. So what normally happens is that the banks with extra cash loan it to the banks that are short of cash. This is interbank lending and it's hugely important. What's happened in the last few weeks is that the banks with extra cash have stopped lending to the other banks because they are suddenly worried they won't get their money back. As a result, the whole credit market has just frozen up and this is the problem the European governments are proposing to tackle. They have in mind a two-part program. It's based largely on the British plan that was outlined last week.

First, they're going to inject cash, billions and billions of dollars into all these cash-poor banks so those banks can get back to normal operations again, and that's what was announced in London this morning. But just as important, Renee, maybe more important, the governments are telling these banks with extra cash that if they go ahead and start lending to the poor banks again, the government will guarantee those loans. They're saying, don't worry about not getting paid back. We will guarantee your loans. You have nothing to worry about.

MONTAGNE: Basically what? Co-sign those loans?

GJELTEN: Right, Renee. It's like if you have a son or a daughter who wants to buy a car but doesn't have good enough credit to get a loan. As a parent, you can co-sign the loan guaranteeing that you'll pay the loan back if your son or daughter can't. These European governments are telling the banks with extra cash, that if they are willing to loan to the poor banks again, the governments will guarantee those loans.

MONTAGNE: Now, the statement from Paris, the summit there, said that these governments would do this in a coordinated fashion. For the EU, what does that mean, because they haven't coordinated very well up until now?

GJELTEN: Well, we haven't heard the details yet, Renee. You're right. Each government is going to do this in its own way. And in the next few hours, today and tomorrow, we're going to see announcements in turn from each of these governments about how exactly they're going to proceed. But, so far, we're just talking about the 15 countries that used the Euro as their currency. Now, it does make it a little bit easier because they all have the same currency. They share a common central bank, it's the European Central Bank, and this ECB will play a crucial role here. But what we're waiting to see is which governments are going to back up which banks and how much they're going to put in to this program.

MONTAGNE: Well, again, the United States' plan, its own bailout plan. As you said, the European plan, the details are not absolutely clear. But how is this different from the U.S. bank bailout?

GJELTEN: The main difference, Renee, is this loan guarantee that I'm talking about. To get the banks to start lending to each other again, that's the unique aspect to this program. It was actually the British government's idea. This program is very much modeled on that program the British government introduced last week, but it goes beyond the U.S. plan.

MONTAGNE: Now, finally, one of the reasons the European leaders worked so hard to get this out by this morning, was they wanted to get it out before the markets opened. What has been the market reaction so far?

GJELTEN: Positive, Renee, in Asia. The markets also opened higher in Europe today. That's not entirely a surprise because they were so over sold that, I think there's been some bargain-hunting. The big question is how the markets are going to react over the next couple of days.

MONTAGNE: NPR's Tom Gjelten is following the financial crisis from Frankfurt, Germany. Thanks very much.

GJELTEN: My pleasure, Renee.

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