PARIS: Countries that use the Euro will temporarily guarantee future bank debt to encourage lending and ease the credit crunch, says a draft statement that came under discussion by European leaders on Sunday.

According to the declaration, the governments would guarantee “for an interim period and on appropriate commercial terms” new debt issued by banks for up to five years. “This scheme would be limited in amount, temporary and will be applied under close scrutiny of financial authorities until Dec 31, 2009,” it says. The leaders of the 15 Eurozone nations held an emergency summit on Sunday night in Paris to seek European solutions to the financial crisis engulfing markets worldwide. The meltdown dominated summits around the world this weekend.

The statement also says that one way the governments could save banks would include buying big stakes. Whatever is decided will then be proposed to the full 27-member European Union at a summit later this week.

British Prime Minister Gordon Brown, whose country has not adopted the Euro currency, was invited to Paris because the Eurozone wanted possibly to replicate something like the 50 billion pounds rescue plan announced in London last week. He told the reporters, “I believe that we will see over a few days worldwide action that will make people see that confidence in the banking system can be restored.”

Brown who met France’s President Nicolas Sarkozy before the summit, said the plan “would involve not only more cash in the financial market but also a recapitalization of our banking system and allied to that something that I believe is absolutely crucial to begin again the funding of businesses and mortgages with a guarantee given by governments. That can happen and will happen in the next few months,” he told reporters. “This is an important moment of the world economy. Decisions that we make in the next few days are decisions that will affect us for many years ahead,” he said.

Earlier, summitís host Sarkozy hoped the meeting would come up with an “ambitious and coordinated plan” to tackle the crisis, which spread from the United States more than a year ago but has hit fever pitch in recent weeks.

Sarkozy said he would announce some specific French measures for the domestic banking sector on Monday (today), and Berlin made similar noises about Germany.

German Chancellor Angela Merkel said she hoped leaders could provide a very important signal for the markets. ìOur goal is to define a coordinated joint action for the Eurozone so that we can in the coming days take national measures that stabilize the financial markets, but that also don’t discredit the individual member states,” she said.

Reuters adds: Earlier, officials suggested action rather than rhetoric could emerge from a gathering that involved the leaders of Britain and the 15 countries of the euro currency zone as well as European Central Bank President Jean-Claude Trichet.

Money markets, less visible to the public, are essentially on life support and dependent on regular, massive injections of emergency liquidity from central banks across the globe because banks themselves will not lend to each other as they used to.

The Paris meeting has been hastily arranged by Sarkozy on the heels of a G7 summit of rich nations in Washington that offered no concrete, collective action but promised to do whatever was needed to unfreeze credit markets.

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AFP adds: After urging his peers gathered in Paris to speak “with one voice,” Sarkozy presented a draft statement, whose most eye-catching pledge was to guarantee new medium-term loans between private banks in a bid to kick-start lending. This offer would stand for an “interim period” and would see governments underwriting new loans of up to five years “on appropriate commercial terms” by a variety of means, including issuing securities.

As the leaders discussed the draft, Belgian Finance Minister Didier Reynders briefed reporters that the Eurozone countries should have until Wednesday to decide how much each will set aside. “What we need now is for each country to fix the sum that it wants to put aside. This should happen by Wednesday,” Reynders said on the sidelines.

On Wednesday, all 27 European Union leaders will meet in Brussels. The leaders were also expected to commit themselves to preventing any bank collapse and would step in to recapitalise failing institutions.

“We confirm today our commitment to act together in a decisive and comprehensive way in order to restore confidence and proper functioning of the financial system,” according to a copy of the draft statement seen by AFP. Marco Annunziata, Chief Economist for UniCredit said, “If market confidence is not restored this weekend, it’s game over.”