Germany guarantees savings in global finance crisis

MARKED DIFFERENCE: Chancellor Merkel's deposit guarantee has put her at odds with the EU Competition Commissioner. (Getty Images)

Germany said on Sunday it would guarantee more than 500 billion euros ($693 billion) in private deposit accounts to protect savers from the worst global financial crisis since the 1930s.

Fellow European Union country Ireland last week promised to guarantee all deposits in its banks, prompting some depositors in Britain to move savings to branches of Irish banks and drawing criticism of a fragmented EU response to the crisis.

EU Competition Commissioner Neelie Kroes said on Sunday there was a discriminatory element to unlimited guarantees on bank deposits and that she expected Ireland to modify its guarantee plans.

However, that does not appear to have deterred Germany, Europe's largest economy.

"We say to savers that their deposits are safe," Chancellor Angela Merkel said at a news conference in Berlin. "The federal government is also committed to that."

European banks have been hit hard by the fall-out from a crisis which began in the United States when the housing market collapsed and bad mortgage debts multiplied.

The escalating crisis has paralysed wholesale money markets, caused huge volatility on stock markets and changed the banking landscape in a matter of weeks. It is also one of the factors pushing many industrialised countries towards recession.

Italian Economy Minister Giulio Tremonti said on Sunday that the crisis still had a long way to run. "All crises finish and this one will finish too," Tremonti told a centre-right political gathering in Milan. "It's hard to say which phase we are in, we are probably still at the end of the beginning."

The US authorities last week approved a $700 billion bank bailout in an attempt to stem the crisis.

Leaders of Europe's four biggest economies decided against a US-style bailout when they met in Paris on Saturday and vowed to restore financial stability.

That pledge faced its first test on Sunday when officials from the German government, central bank and financial regulator struggled to save lender Hypo Real Estate , a vital financial player.

Banks and insurers pulled out of a state-led 35 billion euro ($48.5 billion) rescue plan because new financing problems had emerged at Munich-based HRE.

Its fate now hinges on a battle between the government and banks over who picks up the bill for the rescue.

"The German government says today that it will not allow the problems of one financial institution to become a problem for the entire financial system," Merkel said.

HRE is relatively small when compared to other firms in Frankfurt's blue-chip DAX index of leading companies, but its role as a lender for commercial property, infrastructure and government financing makes it a major financial player.

It accounts for about a fifth of Germany's 900 billion euro Pfandbrief - or covered bond - market, which is a crucial source of refinancing for the financial sector.

Belgium and Luxembourg were scrambling to protect depositors and tens of thousands of jobs by finding a buyer for what remained of bank and insurance group Fortis after the Dutch nationalised the rest.

Belgian radio reported that France's BNP Paribas was in talks to buy up to 80 percent of the business.

In another frenzied weekend for the financial sector, Merrill Lynch and Italy's Mediobanca were working on a 2.0 to 2.5 billion euro capital hike for UniCredit to strengthen Italy's second-biggest bank.

At their weekend meeting in Paris, the leaders of France, Germany, Italy and Britain agreed that European rules limiting government deficits and state aid should be applied flexibly given the exceptional circumstances.

Analysts said the leaders' statements did not contain any immediate concrete steps that would restore confidence.

However, the United States welcomed efforts to coordinate a response.

"EU nations are working to address the crisis in their own financial sector, and we support them," White House spokesman Tony Fratto said on Sunday.

"US Treasury officials are in regular contact with their G7 counterparts, and the Federal Reserve is working in a coordinated way with other central banks," he said.

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