Greece's deposit guarantee deepens EU financial rift

Europe's dispute over how to protect the banking sector from the financial crisis deepened yesterday when Greece joined Ireland in offering to guarantee savings in domestic banks.
George Alogoskoufis, the Greek finance minister, said deposits "in all banks that operate in Greece" would be "absolutely guaranteed", amid signs that savers were becoming restless.
The move by a second eurozone country presented a big challenge to European leaders meeting at an emergency summit tomorrow in Paris to hammer out a coordinated response to the threat of meltdown among European banks.
Ireland's move, which passed through parliament after 30 hours of debate, amounts to a €440bn (£313bn) underwriting exercise that has been criticised as anti-competitive. The European commission has said it is not yet clear whether the Irish move is legal. Market experts said there was growing concern of a rift between those guaranteeing their banks and those refusing to write blank cheques.
As they prepare for tomorrow's Elysée palace meeting, European leaders were warned by a group of leading economists that without a common response, Europe could be faced with a 1930s-style depression, putting the savings of hundreds of millions of people at risk and destroying millions of jobs and businesses.
But it was clear last night that there is no consensus among the leaders about what action to take and they have rejected a French-inspired idea of following the US and creating a "Euro-tarp" or troubled asset relief programme (bail-out).
That could have been worth €300bn compared with the $700bn (£396bn) Paulson plan. But one senior Brussels official said: "It's dead, fini, kaput." Jean-Claude Trichet, president of the European Central Bank, said it simply did not fit the political structure of a non-federal EU. Gordon Brown, Angela Merkel, the German chancellor and Silvio Berlusconi, Italy's prime minister, and their host, French president Nicolas Sarkozy, are most likely to endorse a scheme to earmark national reserves that could be injected as public equity into failing banks.
Jan Peter Balkenende, the Dutch prime minister, said after talks with Sarkozy in Paris that the reserve could amount to 3% of each country's GDP, compared with 5% in the US plan. "If you put that together, it's a lot of money," he said.
The putative French suggestion for an EU-wide bail-out was first floated on Wednesday by Christine Lagarde, the French finance minister, in an interview with the German business daily Handelsblatt. But hours later she told BBC Newsnight no such plan existed.Sarkozy also denied the idea of a Euro-tarp. "I deny both the price and the principle," he said.
The French president got short shrift from Brown and Merkel, both of whose governments have been involved in national bank rescues - Northern Rock and Bradford & Bingley in the UK and IKB, Sachsen LB, West LB and Hypo Real Estate in Germany. Merkel told Bild-Zeitung yesterday: "The federal government cannot and will not write a blank cheque for all banks, irrespective of whether they behave responsibly or not."
Jean-Claude Juncker, Luxembourg's prime minister who will attend the Paris summit, told German radio: "I see no reason why we should mount a US-style programme in Europe." He said the crisis came from the US and was deeper there.
That is a view shared by leading German politicians who slapped down Deutsche Bank's chief, Josef Ackermann, when he also floated the idea of a Euro-tarp.
The ECB has already injected hundreds of billions of euros into the banking system. After voting unanimously yesterday to keep interest rates on hold at 4.25%, Trichet gave the broadest of hints that its contribution to the weakening EU economy would be to cut rates, perhaps as early as next month if the crisis deepens or certainly in the new year.
He will also attend the summit, but refused to say what he expected the result to be. Welcoming recent rescues of banks such as Fortis and Dexia, he told the monthly ECB news conference that "in exceptional cases where financial stability is at stake", it was the duty of national governments to intervene. But he also criticised banks for over-reacting to the credit squeeze and exacerbating it by refusing to lend to each other. "I call upon them to keep their composure," he said.
That call for calm is likely to be one outcome of the summit, which will also be attended by José Manuel Barroso, the European commission's president, who met leading commercial bankers for dinner last night. Among them were the heads of pan-European banks such as RBS, HSBC, BNP and UBS.
Barroso, who speaks on behalf of smaller EU countries not at the summit, has spearheaded the Brussels plans for pan-European regulation of banks and new accounting rules to evaluate complex financial products. He also favours upgrading the current deposit guarantee scheme, which safeguards a minimum of the first €20,000 of savings. The summit will also endorse plans for curbing excessive boardroom pay.
http://www.guardian.co.uk/business/2008/oct/03/europeanbanks.banking