European interbank antifreeze to start the thaw

By Mike Dolan and Jamie McGeever

LONDON (Reuters) - Europe's latest plans to unfreeze bank-to-bank lending at the heart of the financial crisis raging through world markets looks like the beginning of a solution to get global banking and credit back on track.

After weeks of successive U.S. domestic bailouts of its financial system and piecemeal European rescues of individual banks, leaders from the euro zone and Britain on Sunday hatched their most comprehensive plan to date to thaw the markets.

"The freeze is starting to thaw," said Lena Komileva, economist at brokers Tullett Prebon. While risks still remain, she cited the tentative decline in interbank lending rates, initial rally in stock prices, lower prices for safe-haven government debt and the U.S. dollar as positive signs.

The euro zone statement appeared to use as a template last week's British proposals to save its banks.

There are three main elements -- recapitalise the banks via government investment in preference shares; step-up liquidity operations by the central banks to meet a chronic shortage of U.S. dollars; and use government guarantees to help banks, hobbled by the a lack of trust within the malfunctioning money markets, to refinance on interbank and medium-term debt markets.

Together with the world's other leading central banks, the European Central Bank on Monday has stepped up the provision of dollar lending to banks from overnight funds through to three months. France and Germany then followed that, and Britain's lead, by outlining several hundreds of billions of euros in bank recapitalisation and bank lending guarantees.

The British interbank guarantee, which looks likely to be adopted in part by Germany and France, effectively allows adequately recapitalised banks to seek government backing for short-term borrowings in return for a fee.

Britain said last week around 250 billion pounds would be available for this backstop. A draft of Germany's plan on Monday outlined some 400 billion euros of bank borrowing guarantees and media reports said France would provide 300 billion.  Continued...