Europe Follows German Plan
October 6, 2008
Calls for a common European approach to the banking crisis continued on Monday as both the European and Asian stock markets were down sharply in early trading.
Up until this weekend, Germany had stoically opposed issuing a blanket guarantee on all bank deposits despite other countries moving to do so. Yet with confidence deeply shaken after a first bailout for Hypo Real Estate fell through, the German government abruptly changed course on Sunday.
In an attempt to prevent a run on banks, Germany announced it will guarantee all personal bank deposits in the country.
“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.
Now Britain is reportedly under pressure to change its stance. Britain had criticized recent decisions by Ireland and Greece to guarantee savings accounts, worrying that the moves could shift money away from British banks.
Germany leads, others follow
British Finance Minister Alistair Darling is expected to address the issue in a speech to lawmakers on Monday.
Britain has already promised to increase the level of private savings guaranteed by the government to 50,000 pounds ($88,000) per person. The government has hesitated to go any higher than that due to the potential costs involved.
Darling is reportedly considering using public funds to take stakes in banks. The plan is a middle course between nationalizing banks and handing out further loans.
"Germany is Europe's economic superpower," said Nick Clegg, leader of the Liberal Democrats, Britain's third-largest party. "Where it leads, others are bound to follow.”
Clegg said a common European approach to deposit guarantees is necessary.
Denmark on Sunday announced the country's banks had agreed to contribute 35 billion kronor (4.8 billion euros) to help ailing banks and guarantee deposits. Italy wanted an even more united response, calling for an overarching European bailout plan.
Investors remain skittish
Investors seemed spooked at signs of escalating problems in Europe's banking sector. Frankfurt's stock market fell sharply on Monday, with stocks down 3.29 percent at the opening. Asian stocks also dropped, with Tokyo at a four-year low.
Frankfurt's blue chip DAX slumped 4.54 per cent to 5,533.57, its lowest level since July 2006.
Besides the German rescue of Hypo, there were more signs over the weekend that European governments were scrambling to rescue struggling banks.
French Bank BNP Paribas agreed on Sunday to take control of ailing finance group Fortis's operations in Belgium and Luxembourg through a share issue, saying the operation valued the company at 14.7 billion euros.
The Belgian and Luxembourg governments had partially nationalized the bank a week ago, but after the Dutch government took over full control of Fortis' operations in the Netherlands, they began looking for a suitor.
On Saturday, leaders of Britain, France, Germany and Italy said they would protect fragile banks, but would not copy the blanket $700 billion bailout agreed in the US last week. EU finance ministers will try to put together plans on Monday and Tuesday for restoring confidence in the banking system.
Germany looks to restore confidence
Germany had previously guaranteed 20,000 euros ($28,400) savings per person.
Finance ministry spokesman Torsten Albig told the business daily Handelsblatt that the estimated value of the guaranteed all accounts would total 568 billion euros.
Handelsblatt said the state was the only "fire brigade" that could come to the rescue in the face of a crisis of this size.
"This means the government and the banks will have to bite the bullet," it said.
"This is an important signal intended to bring a calming, instead of reactions that are disproportionate and make crisis resolution and crisis prevention more difficult," Finance Minister Peer Steinbrueck said.