E.U. Seeks A Unified Approach To Crisis

The tiny nation of Iceland is scrambling to prevent a financial collapse, begging other nations for loans, adjusting the value of its currency and taking over its second largest bank. Video by AP
By Edward Cody
Washington Post Foreign Service
Wednesday, October 8, 2008

PARIS, Oct. 7 -- The European Union raised its guarantee on private savings from $27,200 to $68,000 Tuesday and pledged anew to increase coordination among its 27 member governments in containing an outbreak of bank failures threatening to crash the continent's financial system.

The decision, announced by European finance ministers after a meeting in Luxembourg, constituted another attempt to restore confidence among bankers and investors shaken by the discovery that the European financial system is vulnerable to the same poison that has infected the U.S. banking industry and weakened financial markets around the globe.

The ministers met as some of the world's financial markets dropped for another day while others held basically even. With officials closeted in emergency meetings in many other capitals of the world, investors watched for signs of what governments would and would not do.

In Britain, after bank stocks took a huge hit, the government was reported to be fashioning a large-scale bailout. The Russian government pumped new money into the country's banking system; in Iceland, a new international banking center, the government took over the country's second-largest bank and disclosed negotiations with Russia for a $5 billion loan.

In statements after their meeting, European finance ministers spoke of common strategy, after 10 days of governments making decisions on their own despite ringing declarations of unity from their leaders. "Europe is determined to act in a coordinated manner in the face of this crisis," French Finance Minister Christine Lagarde told reporters after the one-day meeting.

The ministers promised to talk to one another every day and laid down a set of Europe-wide guidelines for handling collapsing banks. Nevertheless, the prospect was for more country-by-country solutions, with Germany, Britain and other nations opposing suggestions for a $400 billion European bailout fund patterned after the $700 billion plan passed last week in the United States.

So far, depositors have not made a run on Europe's banks, comforted in many countries by government pledges that private account holders would not be allowed to suffer losses from the crisis. Those pledges were given country by country, ranging from public promises such as those made by President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany to full-blown legislation, such as that adopted by the Irish Parliament.

In that sense, the finance ministers' decision had little practical effect. The Irish guarantee now covers any amount deposited by private savers, for instance, and the French government has guaranteed up to $94,500 since before the crisis. Paying little heed to the Europe-wide decision, the Netherlands on Tuesday raised its guarantee to $135,000.

The finance ministers had contemplated a guarantee of up to $135,000 as well. But they scaled back their ambitions after small countries such as Finland expressed fears that they could not back such a pledge if real panic broke out.

In addition, analysts noted, the most pressing problem is not bank deposits, but the fact that European banks have stopped lending to businesses and even to each other, fearful of getting caught holding the bag if another troubled bank goes under.

Alain Minc, a prominent French economist, said such fears are in some ways irrational because European governments repeatedly have promised they will not allow banks to fail. But they have frozen credit across Europe, braking economic activity, he noted.

"The real problems are that banks don't trust each other and won't lend each other money," said Daniel Gros, director of the Center for European Policy Studies in Brussels.

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