EU ministers move to guarantee private savings

EU finance ministers yesterday (7 October) agreed to raise the minimum guarantee for individual bank deposits from €20,000 to €50,000 in an attempt to reassure European account holders.

While a number of member states were keen to raise the threshold to €100,000, French Finance Minister Christine Lagarde explained that for certain smaller or poorer countries with smaller banking institutions, this would have been too difficult to cover. Governments may nevertheless go beyond the minimum and countries like Belgium, the Netherlands and Austria have already announced that they would raise the bar to €100,000. 

The move, which is hoped will restore some much-needed confidence in Europe’s money markets, is the first real coordinated action taken by the EU to address the financial crisis that stormed into Europe last week, triggering to a cascade of government bailouts. 

“Europe is committed to acting in a coordinated manner in this financial crisis. We want to protect our citizens,” emphasised Lagarde. 

Level playing field 

Ireland got the ball rolling when the government unilaterally announced a €400 billion guarantee scheme to safeguard the deposits and debts of six of its major financial institutions – a measure initially slammed as “discriminatory” against other EU banks by EU Competition Commissioner Neelie Kroes, but swiftly followed by Germany, Greece, Austria and Denmark. 

According to Dutch Finance Minister Wouter Bos, by raising the threshold to €100,000, the “level playing field” between European banks has been restored. 

But while Kroes provisionally gave the thumbs up to the German and Austrian state guarantees, which are limited to retail bank deposits, she said the Irish blanket guarantee on all retail, commercial and inter-bank deposits would need some “fine-tuning” in order to comply with European competition rules.

She further announced that the Commission would “shortly issue guidance, permitting rapid assessment of the state aid compatibility of national recapitalisation or guarantee schemes,” stressing that it was crucial that emergency bailouts and takeovers of failing banks remained in line with competition rules. “If we give in on the competition rules, then we are lost, then there is no level playing field anymore. It will be a wilderness, a jungle,” she said. 

Pledge to save all banks 

The 27 ministers also pledged they would not allow any bank big enough to trigger the collapse of the whole European financial system to fail. “We are not going to tolerate a Lehman Brothers scenario,” stressed Christine Lagarde, adding: “We have agreed to assure the solidity and stability of our financial system and carry out any measure to reach that objective.” 

But despite growing calls for specific EU-wide action, the onus appeared to remain on national solutions, with ministers only agreeing on a set of seven common principles to guide their individual actions. These require that interventions be timely and temporary; that the interests of shareholders and taxpayers be considered; that governments have a say in the management of banks after intervention, including managers’ remuneration, and; that negative spillover effects, including on competitors, be avoided. 

No EU bailout fund 

Ministers continued to disagree on the need to set up an EU bailout fund, modelled on the $700 billion plan approved last week in the US. But Spain effectively became the first European country to follow the Americans in setting up a €30-50 billion fund aimed at buying back assets from its banks to restore liquidity. 

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