10/08/2008 (4:46 am)
European governments guarantee deposits
LONDON–European governments struggled to find a co-ordinated response to the crisis sweeping financial markets today as one country after another announced sweeping deposit guarantees to try and shore up their banks.
Iceland and Denmark became the latest countries to declare a deposit guarantee today after a startling announcement by German Chancellor Angela Merkel yesterday that her government would guarantee all private bank savings and certificates of deposit held in the euro zone's largest economy.
"We want to tell people that their savings are safe," she said.
Faltering confidence in the financial system, undermined by a series of bank bailouts, was precipitating the measures, analysts said, since a failure to match guarantees by Ireland, France, Greece and Sweden could risk a massive fund outflow.
Yet the guarantees themselves raised questions about their potential impact on government finances, and showed European governments were unable to find a unified approach despite a weekend summit where they agreed to do just that.
"Governments have no choice but to give the guarantees on deposits, otherwise we will see runs on banks and a complete loss of business and consumer confidence," said Neil Mackinnon, chief economist at ECU Group.
"The stakes have never been higher," he added.
Markets responded to the disarray by sinking rapidly, following selloffs in Asia. Meanwhile, the euro slid below the US$1.36 mark for the first time in over a year.
The crisis engulfing Europe and its markets has fuelled talk of co-ordinated interest-rate cuts by the world's leading central banks.
So far, the banks have continued to flood the money markets with additional liquidity.
British Prime Minister Gordon Brown planned a call to Merkel to discuss the crisis, and Britain's Treasury chief, Alistair Darling, was due to make a statement to Parliament later. So far, Britain has raised its deposit guarantee only to 50,000 pounds (US$87,900), but was under pressure to guarantee all deposits.
French President Nicolas Sarkozy spoke by telephone with Brown, European Central Bank President Jean-Claude Trichet and European Commission President Jose Manuel Barroso.
"We need a co-ordinated response," Sarkozy said. Meanwhile European Union finance ministers were set to begin two days of talks on the crisis in Luxembourg (cash loans).
"This is a very serious situation and one that needs to be addressed," said EU spokesman Johannes Laitenberger. "Obviously there is a great effort under way. Nobody is suggesting that this is business as usual, but it's true that there is not one single magic bullet that will solve this."
The renewed effort to co-ordinate a response came after the weekend commitment by Europe's four leading economic powers – Germany, France, Britain and Italy – to work together.
That commitment fell apart yesterday when Merkel announced that all 568 billion euros (US$786 billion) worth of private deposits held in Germany would be guaranteed, alongside a new 50 billion euros ($69 billion) bailout package for Hypo Real Estate AG, Germany's second-biggest mortgage lender.
"The EU is liable to be exposed as a fair weather construction, lacking the means of swift response and the hold over its citizens' loyalties to survive really adverse conditions," said Stephen Lewis, an analyst at Monument Securities.
In a joint statement today, Merkel and Finance Minister Peer Steinbrueck said the guarantee was "an important step at the right moment."
In response to the German move, the Danish Economy Ministry said commercial lenders had agreed to contribute up to about $6.4 billion over two years to a fund that will help insure account holders from losses. Austrian officials have indicated they might join in as well.
That was followed by Iceland's guarantee of all deposits after trading was halted in six bank stocks. Icelandic banks' assets dwarfs the rest of its economy and its currency has fallen sharply in the past week.
The markets are skeptical that Europe's piecemeal response to the crisis so far will work to stem the selling tide.
"The main problem for Europe is that a co-ordinated response has proved impossible to reach, and the case-by-case approach that has so far been applied has clearly failed to restore confidence," said Dragana Ignjatovic, European analyst at Global Insight.