Germany to Guarantee Bank Deposits; Efforts to Salvage Hypo Bank Continue

In response to the crisis at Hypo Bank, Germany said it will guarantee bank deposits. Note that no action was announced regarding Hypo, whose collapse is expected in the next few days if a rescue is not in place. Hypo is not a depositary institution, but it is sufficiently large (almost as big as Lehman) that its failure would be damaging to an already-stressed banking system.

From MarketWatch: Germany became the latest and by far the biggest European country on Sunday to explicitly guarantee the deposits in banks held by their citizens.

Chancellor Angela Merkel said in an announcement Sunday that she could not allow problems around Hypo Real Estate, a commercial property lender, to affect the broader system.

Ireland and Greece took similar moves last week, though Germany’s move is only aimed at individual and not company deposits.

Merkel attended a meeting on Saturday held by French President Nicolas Sarkozy in which Germany, France, Italy and the U.K. said they would try to coordinate their responses to the current turmoil in global financial markets but did not set up formal bailout fund. More detail from Bloomberg:

The German government offered to fully guarantee personal savings accounts in a bid to ease concerns about the stability of the nation’s banking system amid the global credit crunch.

“Finance Minister Peer Steinbrueck said today that people in Germany will not lose a single euro of their savings because of this crisis, and that statement applies as of today,” said his chief spokesman, Torsten Albig, in a telephone interview from Berlin.

Until now, private savings accounts, including the accounts of small, privately held companies, have been guaranteed by 180 banks in Germany, the BDB private banks group said on Oct. 2. The guarantees of the banks covered 90 percent of an account’s balance to a maximum of 20,000 euros ($27,500), the group said.

Bloomberg also provided, in a separate story, an update on the Hypo rescue talks:

The German government led talks to salvage a 35 billion-euro ($49 billion) bailout plan for Hypo Real Estate Holding AG after the ailing property lender said commercial banks withdrew their support late yesterday.

`I’m pretty shocked that this bank’s management has revealed another liquidity gap of an unforeseen size,” German Finance Minister Peer Steinbrueck said in Berlin today in comments broadcast by ARD television. “We will have to start over again from last weekend’s meetings. Hypo Real Estate has to be stabilized otherwise the damage would be unpredictable.”

The government and the Bundesbank have repeatedly said that Hypo Real Estate, the nation’s second-biggest property lender, is too big to fail. The negotiations to save it occur as the Belgian government is attempting to rescue Fortis, that nation’s largest financial-services company, after a previous bailout also went awry amid the intensifying global credit crunch…

The government won’t raise the size of its pledged guarantee, newswire Deutsche Presse-Agentur reported, citing Volker Kauder, parliamentary chairman of Chancellor Angela Merkel’s Christian Democrats. Private banks promised to contribute their share to a rescue today, he added, without elaborating, DPA said.

More detail from the Wall Street Journal, that private banks are being muscled back to the table: Finance Minister Peer Steinbrueck, who spoke at the press conference with Merkel, said the government was working on an “institute-specific solution” to Hypo’s near-bankruptcy. “We have to start again where, at the end of last week, we thought we had a solution,” he said….

The German finance ministry doesn’t believe that the rescue of Hypo will only involve the government, a finance ministry spokesman said Sunday.

“The minister has made it clear: We won’t refrain from having the private banks participate in an adequate way,” Mr. Albig, the Finance Ministry spokesman, said. A solution must be found by the stock exchange opening early Monday, Mr. Albig added.

Originally published at Naked Capitalism and reproduced here with the author’s permission.