Europe strives to combat financial crisis in unison

PARIS/LUXEMBOURG Mon Oct 6, 2008 7:46pm EDT

PARIS/LUXEMBOURG (Reuters) - European governments struggled on Monday to shelter banks and bank depositors from a global financial crisis that is eroding confidence, endangering the economy and challenging their ability to respond as one.

Germany promised blanket deposit protection for bank savers, prompting similar responses from Austria, Denmark and Sweden, days after Dublin took more draconian deposit insurance measures in a bid to restore confidence in the banking system.

French President Nicolas Sarkozy issued a statement in which the 27 European Union countries committed to do what was needed to counter market mayhem and ensure no savers lost any money. His country holds the EU's rotating presidency.

As the politicians busied themselves to prevent panic, banks were prominent losers as European shares suffered their worst one-day percentage fall on record on Monday, sinking to four-year closing lows.

Things moved so fast that Finance Minister Peer Steinbrueck pulled out of meeting with other euro zone ministers to work on a system-wide rescue plan for Germany, just hours after signing the second bailout in a week for a property finance group hard hit by the global credit crunch, Hypo Real Estate.

The euro zone ministers, meeting in Luxembourg, discussed the assurances on financial stability and bank solidity first given by the leaders of Germany, France, Britain and Italy after an emergency summit in Paris on Saturday.

European Central Bank chief Jean-Claude Trichet, present in Luxembourg, said the euro zone's central bank would continue to pump emergency funding liquidity into wholesale money markets to fight the paralysis caused by the credit squeeze.

"You can tell the citizens they can count on the ECB," he told a news conference.

"We acted in good time and to a sufficient degree on money markets and we will continue to provide money markets with all the liquidity they need for as long as that is necessary."

The EU statement read out by Sarkozy extended a commitment made even before the finance ministers met and effectively broadened the promise of blanket bank deposit protection to the entire EU bloc, at least in the sense of a political pledge.

"All European Union leaders declare that each of them will take the necessary measures to ensure the stability of the financial system," it said.

"No depositor in our countries' banks has suffered any losses and we will continue to take the measures needed to protect the system and depositors," it said.

The leaders of Europe's four largest economies pledged on Saturday to defend the stability of the banking system on a case-by-case basis, nationally or collectively, without recourse to the creation of a pan-European rescue fund.

The message from Jean-Claude Juncker, chairman of the euro zone finance ministers' meeting and prime minister of Luxembourg, was the same.

ONE CHORUS, SEVERAL SOLOS

That summit had prescribed nothing specific on the levels of protection for bank deposits and German Chancellor Angela Merkel made it clear at the time leaders were not pleased with Ireland for jumping the gun without consulting.

The national announcements made on Monday and a threat from Spain highlighted how hard it is for EU countries to act in unison, as did the fact that Italian Prime Minister Silvio Berlusconi released the EU statement minutes before Sarkozy.

Before that statement was produced, Spanish Economy Minister Pedro Solbes had said Spain was ready to move unilaterally to guarantee deposits if an EU-wide move did not materialize fast.

Sarkozy was back on the phone on Monday to British Prime Minister Gordon Brown, the ECB's Trichet and European Commission President Jose Manuel Barroso, and said he would also contact Germany's Merkel.

Confusion reigned over the idea of a cross-border government rescue fund for the banking sector after Italy's Berlusconi was quoted by local media overnight as saying such a move -- opposed by Germany and Britain -- was about to be endorsed.

The idea, absent from the declarations made at the Paris summit Berlusconi attended, remained firmly opposed by Germany and Britain. The euro zone finance ministers said little of it.

Arriving for the Luxembourg meeting, Spain's Solbes said it made no sense for Europe to replicate the $700 billion bailout being adopted in the United States but that this did not mean Europe was incapable of finding its own collective response.

Steinbrueck explained Germany's decision to promise full deposit protection for individual savers.

"That's important in this situation because we don't want them to run to their banks filled with fear and withdraw money," he said.

Germany and others are, despite those moves, annoyed with the Irish for going it alone with a more ambitious plan that offers state guarantees for all liabilities of six Irish banks, and via legislation rather than the political commitment that is being made elsewhere so far.

Leaders asked the European Commission, the EU's executive body, to come up with new proposals on deposit protection.

One figure discussed for a minimum guaranteed amount to be harmonized across the EU was around 100,000 euros ($135,900) per depositor versus 20,000 at the moment, though many countries offer more than the minimum.

(Writing by Brian Love, with reporting from bureaux across Europe and euro zone meeting staff in Luxembourg; editing by Dale Hudson)

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