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.
Gros predicted that Germany, Britain and other countries that have resisted creating a Europe-wide bailout fund may eventually be forced to reconsider. "Most finance ministers think the same way -- that their banks are okay and that it's everybody else's that are the problem," he said. "But if the share price of Deutsche Bank drops by another 30 percent, I think the Germans will change their minds."
In a speech to the German Parliament, however, Merkel said such an approach was still unacceptable to her government, adding that it would obstruct quick action and that countries might try to exploit the fund for their own purposes.
Merkel criticized Ireland again for acting on its own last week to guarantee all bank deposits in that country. Germany, Britain and other European Union members complained that Ireland gave its banks an unfair competitive advantage and forced other countries to adopt similar measures to prevent funds from moving to Ireland.
"The Irish method is unsuitable," Merkel said, "because it put its own financial institutions under a protective umbrella but failed to include other international financial institutions, which paid taxes over a long period in Ireland."
The Irish finance minister, Brian Lenihan, told reporters at the Luxembourg meeting, however, that his government had no choice but to act quickly. "There is not enough liquidity in the market," he said, according to the Associated Press. "That's a problem we have to address."
Iceland, meanwhile, moved forcefully to prevent a collapse of its national economy, which was once supported largely by fishing but now depends heavily on banking. It nationalized Landsbanki, the second-largest bank, and announced a $680 million loan to Kaupthing, the nation's largest bank.
Icelandic officials, who have also announced a deposit guarantee, said they were seeking emergency loans from other nations, including more than $5 billion from Russia. "We have not received the kind of support that we were requesting from our friends. So in a situation like that, one has to look for new friends," Prime Minister Geir H. Haarde told reporters in Reykjavik, the capital.
Icesave, Landsbanki's Internet-based service, stopped processing deposits and withdrawals, according to a brief announcement on the Web site. "We apologize for any inconvenience this may cause our customers. We hope to provide you with more information shortly," the notice said.
British media reports said that about 350,000 savers in Britain and the Netherlands have about $7.9 billion deposited through Icesave.
Russia, whose markets have dropped precipitously on the decline of oil prices and the withdrawal of foreign investment, on Tuesday stepped in for the second time to pour cash into a troubled banking system. President Dmitry Medvedev said the government would lend an additional $36 billion to Russian banks, on top of $170 billion already injected into the system.
Though shares of British banking companies dropped severely, Europe's stock exchanges in general closed near the levels of the previous day, which was seen as an improvement over the drastic declines of Monday.
Saudi Arabia's stock market, the biggest in the Arab world, fell another 7 percent Tuesday. Egypt's main index, returning to trading Tuesday after a week-long public holiday, fell by about 16 percent, forcing a trading suspension.
In the United Arab Emirates, Dubai's market fell more than 5 percent even as government-controlled developers announced new multibillion-dollar projects to try to restore confidence in the Persian Gulf's wonder city.
And on Wednesday, Asian stock markets continued their broad sell-off.
Japan's Nikkei average tumbled more than 7 percent in morning trading and is down more than 13 percent this week. The broader Topix index has lost more than 14 percent in the past five trading days.
Indonesia halted trading on its stock exchange Wednesday after the benchmark JSX index dropped more than 10 percent. In Australia, stocks shrugged off Tuesday's 1.7 percent gain, which followed a surprise interest rate cut by the country's central bank, and fell more than 5 percent. Stock indexes in China, Taiwan, South Korea and Singapore were also down.
Correspondents Craig Whitlock in Brussels, Kevin Sullivan in London, Ellen Knickmeyer in Cairo and Blaine Harden in Seoul contributed to this report.