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Germany moves to shore up panicky financial markets

AFP · 6 Oct 2008, 17:14

Published: 06 Oct 2008 17:14 GMT+02:00

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The stock exchange may not have got the message however as shares tumbled seven percent Monday in line with heavy losses elsewhere in Europe and Asia as Wall Street plunged too.

Berlin hoped a new €50-billion ($68-billion) rescue plan for the distressed mortgage lender Hypo Real Estate (HRE) and a blanket guarantee on private bank accounts would prevent panic from seizing a nation of savers.

Finance minister Peer Steinbrück said he did not rule out raising state guarantees on HRE credit lines and that there was "a plan B in the drawer" to ensure the banking sector did not collapse.

Steinbrück did not provide details but told a press conference: "We are aware that we will not get very far with case-by-case solutions." The bank is now to be provided with credit lines worth a total €50 billion, of which a little more than half was to be guaranteed by the state.

HRE shares were hammered in afternoon trading on the Frankfurt stock exchange however, losing 35.15 percent to €4.87.

Meanwhile, the government said it would guarantee private bank accounts, estimated to be worth €1.6 trillion.

Economics professor Hans-Peter Burghof of the University of Hohenheim told German radio that amount represented "the biggest guarantee in history. "Never has anyone anywhere in the world guaranteed such a sum in two simple sentences," he said, while noting that in principle the idea of giving guarantees was to ensure they would not be needed.

Chancellor Angela Merkel told reporters on Sunday that the government "will not allow an institution's crisis to become a crisis for the entire system."

Global Insight senior economist Timo Klein told AFP: "Since they were unable to correct themselves, financial markets looked to the German government (for help). The DAX is now looking for a general plan for the banks, maybe as early as


The European Commission said on Monday that Germany's guarantee of all its bank savings seemed in line with EU competition rules and did not pose the same problems as a similar announcement by Ireland.

"The commission notes that the measures seem to be limited to retail bank deposits, so (it is) less liable to give rise to distortion of competition," said Jonathan Todd, spokesman for EU Competition Commissioner Neelie Kroes.

"In general, retail deposit guarantee schemes can be an appropriate policy response to fears regarding the stability of the financial system," he added.

In contrast, the Irish guarantees cover all deposits and there is also an issue if they apply to non-Irish banks present in the Irish market, said Todd. "The precise details of the (Irish) measures are still being discussed by Irish authorities," he said.

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The German government offered an unlimited guarantee for all private bank deposits Sunday in a bid to prevent a panic run on banks in Europe's biggest economy.

German Chancellor Angela Merkel pledged: "We tell all savings account holders that your deposits are safe. The federal government assures it."

Merkel had sharply criticised Ireland's go-it-alone plan after crisis talks in Paris Saturday with the leaders of France, Britain and Italy.

"We have already asked the European Commission and the European Central Bank to try to talk to Ireland," she said. "It is important to act in a balanced way and for countries not to cause harm to each other."

Commission officials rejected charges that the EU executive's overseeing role was being disregarded as individual member states scramble to shore up their own troubled institutions.

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