LONDON – Individual European governments issued a cascade of deposit guarantees to shore up their banks but fell short of any coordinated action Monday to deal with the crisis sweeping financial markets, even as stock markets crashed and the euro sank to its lowest level for over a year.
Though Europe's officials appeared to be paying lip service to the need for working together, they continued to make key announcements on deposits on a go-it-alone basis.
France, which holds the rotating leadership of the European Union, said its 27 governments have each pledged to take “all necessary measures to ensure the stability of the financial system” but no joint action was forthcoming, fuelling the belief that the crisis would be handled differently by each country.
Germany's Finance Minister Peer Steinbrueck made clear his government's opposition to the idea that the euro zone's single largest economy should put up money to prop up institutions outside his country.
He said Monday that he and Chancellor Angela Merkel were considering creating a “shield” that would protect the country's entire financial sector, and that a Europe-wide shield or bailout was out of the question. “The chancellor and I reject a European shield because we as Germans do not want to pay into a big pot where we do not have control and do not know where German money might be used,” he said in a separate interview with WDR 2 radio.
Germany deepened the sense that events were beginning to run out of control when German Chancellor Angela Merkel said on Sunday that her government would guarantee all private bank savings and CDs held in the country. “We want to tell people that their savings are safe,” she said.
Iceland and Denmark followed Monday with a deposit guarantee, in the former's case only once trading in the shares of six of its banks had been suspended.
Markets responded to the disarray by sinking rapidly, following selloffs in Asia. Russia shut down both its stock markets after they fell more than 15 percent.
At the close, Germany's DAX was down 410.02, or 7.1 percent, at 5,387.01, while the FTSE 100 index in Britain was 391.06 points, or 7.9 percent, lower at 4,589.19. The worst performing major European index was France's CAC-40, which shed 368.77 points, or 9.0 percent, to end at 3,711.98 – its worst performance since it was initiated 20 years ago.
Wall Street took its cue from Europe, with the Dow Jones industrials down 489.03 points, or 4.7 percent, at 9,836.35, amid growing fears that the credit crisis is spreading around the world.
Meanwhile, the euro slid around 2 percent against the US dollar and was trading just above the $1.35 mark, its lowest level for over a year.
Faltering onfidence in the financial system following a series of bank bailouts forced governments to offer deposit guarantees, analysts said, since failure to match those offered by Ireland, France, Greece and Sweden could risk a massive funds outflow.
Yet the guarantees themselves raised questions about their potential impact on government finances and showed that European governments were still unable to find a unified approach despite a weekend summit where they agreed to do just that.
“Even if bank guarantees are not made explicit, it seems very unlikely that any European government would stand by and allow private depositors to lose their savings,” said Jennifer McKeown, an economist at Capital Economics.
“Whether they bail out banks as and when they fail or act pre-emptively to boost bank capital, as has been suggested in Britain, the pressure on government finances will be severe,” she added.
The crisis engulfing Europe and its markets has fuelled talk of co-ordinated interest-rate cuts from the world's leading central banks, possibly as early as Monday.
Analysts said they wouldn't be surprised if the U.S. Federal Reserve, the European Central Bank and the Bank of England instigate the first joint action on interest rates since the Sept. 11, 2001, terrorist attacks on the U.S.
“I think at this point (a coordinated cut is) quite likely with the current spread of problems at full strength on the European financial system,” said Luca Cazzulani, a strategist with UniCredit in Milan.
So far, the banks have continued to flood the money markets with additional liquidity. On Monday, the ECB injected another $50 billion into money markets while the BoE added another $10 billion.
Additionally, the Fed said that 28-day and 84-day cash loans being made available to banks will be boosted to $150 billion each, effective Monday. Those increases will eventually bring the amounts outstanding under the program to $600 billion.
EU finance ministers have an opportunity to discuss the crisis sweeping the Continent as they sit down for two days of talks in Luxembourg.
“This is a very serious situation and one that needs to be addressed ... but it's true that there is not one single magic bullet that will solve this,” said EU spokesman Johannes Laitenberger.
The latest attempt at finding a common response came after a weekend commitment by Europe's four leading economic powers – Germany, France, Britain and Italy – fell apart when Merkel announced Sunday that all 568 billion euros ($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 response to the German move, the Danish Economy Ministry said commercial lenders had agreed to contribute up to 35 billion kroner, or about $6.4 billion (4.6 billion euros), over two years to a fund that will help insure account holders from losses. Austrian officials have indicated that they might join in as well.
That was followed this afternoon by Iceland's guarantee of all deposits after trading was halted in six bank stocks. Icelandic banks' assets dwarf the rest of its economy and its currency has fallen sharply in the past week.
Associated Press writers Matt Moore in Stockholm, Angela Doland in Paris, Patrick McGroarty in Berlin and Jill Lawless in London contributed to this report.
