Tue, Oct 07, 2008 - Page 1 News List

Europe scrambles for rescue plans


With Germany making a blanket guarantee to cover all of the nation’s savings, other European countries were under increased pressure yesterday to bolster their financial defenses.

While Britain was likely to be the first to feel the pressure of the German move, eurozone finance ministers meeting in Luxembourg were also under the gun to flesh out plans for restoring confidence in the crisis-struck banking system after weekend talks among Europe’s biggest economic powers.

While Germany had criticized moves by Ireland and Greece to guarantee bank deposits, on Sunday it reversed course and announced an unlimited guarantee for personal savings deposits, looking to shore up confidence in a country where failing banks evoke bitter memories of the Great Depression that helped bring the Nazis to power.

“We tell all savings account holders that your deposits are safe. The federal government assures it,” German Chancellor Angela Merkel said after an emergency government meeting in a bid to prevent a panic run on banks.

The country later announced a 50 billion euro (US$70 billion) rescue of its fourth-largest bank, Hypo Real Estate (HRE), in its largest-ever bank rescue.

The German reversal on savings ratcheted up pressure on Britain, which has also opposed giving a blanket guarantee on all bank deposits. Finance minister Alistair Darling had the chanece to outline the British response in a speech to lawmakers yesterday.

As he seeks solutions to the crisis, which ministers were to discuss in a meeting of the new emergency economy committee yesterday, Darling was reportedly mulling using public funds to take stakes in banks to help shore them up.

The plan, similar to the Swedish response to its banking crisis in the 1990s, would steer a middle course between full nationalization, as with Northern Rock and Bradford & Bingley banks, and further loans.

The leader of Britain’s third largest party said Britain had no choice now but to follow Germany’s lead on guaranteeing deposits.

“Ireland’s action last week to guarantee all deposits made a common European approach to deposit guarantees necessary. Germany’s decision today makes it completely unavoidable,” said Nick Clegg, leader of the Liberal Democrats.

“Germany is Europe’s economic superpower,” he said. “Where it leads, others are bound to follow.”

Britain has promised to increase the level of private savings guaranteed by the government from £35,000 to £50,000 (US$88,000) per person.

That would cover 98 percent of accounts but only about 60 percent of deposits, but the government has hesitated to give a blanket guarantee given the potential cost.

Austria is also to consider this week guaranteeing bank deposits.

EU finance ministers were expected to detail plans yesterday and today for restoring confidence in the crisis-struck banking system after weekend talks among Europe’s biggest economic powers.

At crisis talks in Paris, the leaders of Britain, France, Germany and Italy vowed on Saturday to protect fragile banks but turned against a copy of the US$700 billion US bailout.

However, Italian Prime Minister Silvio Berlusconi said his country would propose the idea again at the meeting of ministers in Luxemburg and that Germany had withdrawn its opposition.

French Bank BNP Paribas agreed on Sunday to take control of ailing finance group Fortis’ operations in Belgium and Luxembourg through a share issue, saying the operation valued the company at 14.7 billion euros.

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