Scramble to avoid collapse

World leaders are scrambling to finalise rescue plans for their banking systems before stock markets open on Monday, amid fears that the global financial system is on the brink of collapse.

France, Germany and Italy –as well as Britain – were working on dramatic plans, due to be announced on Monday, to shore up their lenders.

The moves came as a hastily arranged summit in Paris saw eurozone governments agree on a broad plan to offer hundreds of billions of euros in guarantees for new, medium-term bank debt issuance.

Under the agreement, struck on Sunday night, the guarantees will have to be offered on commercial terms, must be available to banks of all nationalities, and governments will be able to attach conditions, including assurances on providing credit to companies and households.

In other moves, Norway announced it would offer its commercial banks up to $55.4bn in government bonds in exchange for mortgage debt and Portugal said it would make as much as €20bn ($27bn) available in guarantees for its banks’ financing.

In the US, officials were also working to finalise a plan to recapitalise their banks and other financial institutions, which could be unveiled as early as Monday.

Australia and New Zealand announced guarantees for all bank deposits, as did the United Arab Emirates, while Saudi Arabia cut its interest rates.

The extraordinary series of moves, which followed record market falls last week, came amid grave concern that investors would scramble for cash this week, threatening the implosion of financial institutions.

As world leaders and bankers gathered in Washington for the weekend Group of Seven and global financial body meetings,

Dominique Strauss-Kahn, International Monetary Fund managing director, said: “Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.”

Josef Ackermann, head of Deutsche Bank and chairman of the Institute of International Finance, representing nearly 400 of the world’s largest banks, said the next 24 hours was a “critical moment” for the world crisis. “If we miss this opportunity we will have more deterioration [in markets],” he said.

At the meeting of the 15 eurozone countries in Paris, leaders discussed a draft document likely to follow the outlines of the British bail-out plan – the state taking stakes in banks, guaranteeing new bank borrowing and providing extra liquidity – but adapting the tools to national circumstances.

In addition, the European Central Bank would create an unsecured lending facility to buy commercial paper from banks, similar to the move by the US Fed last week, providing, in effect, guaranteed funding for banks.

Nicolas Sarkozy, French president, said last night: “We need concrete measures, we need unity, which is what we achieved today. None of our countries acting alone could end this crisis.”

The Paris meeting came after G7 ministers in Washington produced a broad-brush plan on Friday to stop banks failing, unfreeze bank funding, inject capital into banks and unblock markets for securitised assets.