EU eyes raising guarantee on private savings

EU eyes raising guarantee on private savings
Tuesday October 7, 7:41 am ET
By Robert Wielaard, Associated Press Writer
EU mulls guaranteeing private savings up to euro100,000 across bloc; nations battle meltdown

LUXEMBOURG (AP) -- An emergency meeting of European Union finance ministers debated raising guarantees for private savings across the 27-nation bloc on Tuesday in an attempt at a coordinated response to the global financial crisis.

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Nations struggled individually even as the ministers met. Iceland nationalized its second-largest bank, fixed the exchange rate of the country's currency and said it had negotiated a euro4 billion ($5.4 billion) loan from Russia to fight a financial meltdown in the tiny Nordic country.

British banks' share prices plunged in early trading as investors worried that the government was not doing enough to boost banks' balance sheets in the crisis.

Shares at the Royal Bank of Scotland Group PLC, which had its credit rating downgraded by Standard & Poor's on Monday, plummeted by 39 percent in the first two hours of trading on the London Stock Exchange, before recovering somewhat.

Central banks around Europe continued to push cash at markets in an effort to keep the financial sector flush with ready money.

Treasury chief Alistair Darling and Bank of England Governor Mervyn King met with the heads of Britain's biggest banks to discuss possible government plans to inject as much as 50 billion pounds ($87 billion) into the institutions.

The meeting was described by two people familiar with the situation, who requested to remain anonymous because of the confidential nature of the meeting.

In Luxembourg, Irish Finance Minister Brian Lenihan said savings of up to euro100,000 ($135,000) would be guaranteed by EU governments.

Until the outbreak of the credit crunch crisis most EU governments guaranteed consumer savings of up to euro20,000 to euro25,000 (about $27,00 to $34,000).

The EU finance ministers discussed steps in line with a weekend announcement from Germany, France, Britain and Italy that the EU will act jointly to calm markets but will not resort to the sort of massive bank bailout that the U.S. Congress has passed.

Other ideas on the table include boosting national supervision of banks and other financial institutions, especially those with operations across several EU nations and curbing bonuses for departing chief executives that are out of step with their performance.

The pledge of coordinated steps by EU governments has failed to reassure markets.

Iceland, Denmark and Germany have said they will guarantee all private bank savings. In the past 10 days Belgium, the Netherlands, France, Luxembourg, Sweden and Ireland have either provided large cash injections for ailing banks or provided credit guarantees worth scores of billions of euros.

Ireland shocked its partners and the European Commission by guaranteeing not just private savings but also banks' debts.

Irish Finance Minister Brian Lenihan defended that Tuesday, saying, "We must restore confidence to the European banking sector." He added guaranteeing deposits was not enough, he said, because interbank loans had also suffered from the crisis.

"There is not enough liquidity in the market. That's a problem we have to address. Ireland has taken an initiative, but we're only a small country," he said.

The current turmoil has triggered calls for the euro-zone to soften the economic criteria underpinning the euro, most notably the requirement that a nation's annual budget deficit cannot exceed 3 percent of gross national product.

That is unlikely to happen. The 3-percent target has long been contentious and three years ago -- in an easing of the euro rules -- governments were given some leeway to use public funds to stoke growth in lean years.

Germany and the Netherlands are most vocally against tinkering with the euro rules again. The European Commission says the rules work and have made the eurozone an area of healthy growth, low inflation and stable unemployment and finances.


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