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| French President Nicolas Sarkozy with Taoiseach Brian Cowen at the Elysée Palace on Oct 01, 2008.
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Germany on Sunday announced that it would guarantee all private German bank accounts valued at €568bn. Denmark made a similar move early Monday. Meanwhile, the UK signalled that it is working on "big steps" to aid its banks that would involve public equity stakes while Iceland is scrambling to avoid a meltdown as the financial crisis has pushed its currency, the krona, down 20% against the euro, in the past month.
The spreading crisis, has prompted speculation that the Group of 7 countries may agree on a coordinated interest rate cut. A meeting in Washington next Friday, on the eve of the International Monetary Fund's autumn meeting, will bring finance ministers and central bankers of the United States, Canada, UK, France, Germany, Italy and Japan, together at a time when recession anxieties have overtaken inflation worries, with oil prices down 36% from July peaks.
“We want to tell people that their savings are safe,” Angela Merkel, German chancellor, said at a press conference on Sunday. Germany had guaranteed 90% all bank deposits but only up to €20,000 per account.
Late Sunday, the German government said the country’s commercial banks had agreed to inject an extra €15bn of liquidity into Hypo Real Estate, the embattled German mortgage and public sector lender, raising the value of last week's bailout to €50bn. The original rescue plan was on the verge of collapse, when it became clear that additional funding was required beyond the €35bn that had been first guaranteed by the government and other banks.
The UK and France are likely to also ramp up guarantees to avoid capital flight.
It was announced on Sunday that BNP Paribas, France's biggest bank, will take control of Fortis's units in Belgium after a government rescue of the Brussels and Amsterdam-based company failed.
The Danish government announced early on Monday that it would guarantee all bank deposits in Denmark as part of a deal with banks to set up a Dkr35bn (€4.7bn) liquidation fund. Deposits in Danish banks had been guaranteed up to 300,000 crowns.
A weekend summit of the leaders of France, Germany, Italy and the UK agreed not to let any large financial institution in their country fail, according to reports.
German officials were reported to have said that the move was agreed because of fear that the crisis at Hypo Real Estate would lead to widespread panic on Monday.
Last Thursday, the president of the European Central Bank, Jean-Claude Trichet, said that Europe lacks the political and budgetary structures for a single response to the growing economic crisis
Financial Times columnist Wolfgang Münchau writes today: "The Europeans are of course right in their overall ambition not to allow systemically important banks to fail. They are also right in their scepticism about their ability to distinguish between illiquidity and insolvency during an emergency. But I fear we are still well short of a strategy. We might be lucky, and scrape through what could well become the most dangerous month of the crisis so far. If, for example, the credit default swap market were to blow up in the next couple of weeks – a non-trivial probability – we have no plan.
Nicolas Sarkozy, the French president, was therefore right when he appeared to back a €300bn rescue fund. Regular readers of this column will probably recall my somewhat constrained enthusiasm for his economic policies. But this had the makings of a good plan. He ended up distancing himself from it, when it became clear that Angela Merkel, the German chancellor, would not support it. But he was right and she was wrong. Of course, a European plan should not have been a copy of the bail-out that was finally adopted by Congress on Friday. The US plan failed to address the problem of an undercapitalised banking sector. That issue is even more important in Europe where many banks have an extremely weak capital base, with leverage ratios of 50 or more."
UK Chancellor of the Exchequer Alistair Darling signalled on Sunday that he is considering a dramatic taxpayer-funded recapitalisation of UK’s banks.
The Chancellor said he was “looking at some pretty big steps which we would not take in ordinary times”. Government officials are reported as saying these include a contingency plan for the taxpayer to inject capital into struggling banks.
The government may have a role to play in "recapitalising" major High Street banks, Conservative Party leader David Cameron said, citing Sweden's decision to buy stakes in leading banks in the 1990s as a successful confidence-building measure.
"There is one only thing worse than state aid for banks and that is not doing anything," he told the BBC's Politics Show.
He stressed that such steps "may not be necessary" if the US government's bail-out plan for Wall Street helped to quickly restore confidence in global financial markets.
But he added: "I hope it is not necessary but if it is, it is something we would want to talk to the government about and make sure it is done in the right way."
Mervyn King, Governor of the Bank of England, who met Cameron last week, is also believed to favour a recapitalisation plan to supplement the central bank’s own operations to boost liquidity to the financial system.
Darling plans on Wednesday to set out how he intends to manage the worsening public finances during the downturn, while on Thursday the Bank of England is widely expected to cut interest rates from 5%.
Iceland's prime minister Geir Haarde has said he is in a race against time to negotiate a rescue deal for the country’s ailing financial system that could include a merger of some of the nation’s banks.
The FT reports that pension funds were being urged to repatriate foreign assets, while the Central Bank was looking to bolster its foreign exchange reserves. The government may this morning announce plans for several billion euros to be injected into the Central Bank, people with knowledge of the talks said, although others warned there was no certainty that a deal would be reached or that it would be sufficient to reassure nervous markets.
Iceland's benchmark interest rate is 15.5% and the current inflation rate is 14% - a reminder to the Irish of what life would be like without the protective embrace of the Eurozone.
